Payroll is one of the major expenses any business of any size needs to account for, and controlling it is an important part of profitability. It's also a key element in financial accounting. To determine the total cost of payroll, employers must calculate gross wages, which are different from the wages that workers actually receive.
Calculating payroll gross wages for the year begins with a review of the company's payroll records. The first part of the calculation involves adding up wages, which are the pretax payments to all employees. Money that employees have set aside for retirement plan and benefit plan contributions are also part of gross wages. A year's gross wages include all wage payments made during the year, including payments for work done during the previous calendar year.
Cash wages are not the only type of compensation that figures into the calculation of gross wages. Employers must add in the value of several different types of benefits and additional compensation to produce gross payroll figures. Common additions include cash commission, bonuses, stock options, overtime pay, pay for holidays and other paid leave, and reimbursement for travel expenses. Employers must also add the money they pay, as required by law, to cover Social Security and unemployment insurance programs.
Some elements of payroll and worker compensation do not count as gross wages. If they are accounted for in an employer's payroll totals, they need to be subtracted to determine gross payroll. Tips and gratuities that workers receive, while taxable, are not part of gross wages for the employer. Bonuses for special inventions and discoveries are also not part of gross wages. In addition, severance pay does not count toward an employer's gross wages.
An employer can determine gross wages for a year using payroll records. Payroll software and outside payroll services can supply year-end wage data to make the process easier. While most elements of gross wages are valued as cash, others are harder to value. For example, employers must use fair market value to determine the cost of stock options and bonuses that are part of gross wages. Payroll gross wages for a year can be recorded for each employee, for the business as a whole, or divided among employees for an average gross wage per worker.
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