It would be nice if all the money you earned went straight into your pockets, but with the constant threat of taxes, that’s unlikely to happen. Your gross pay is all of your compensation, and your taxable pay is the amount from which taxes are deducted. Taxable pay is usually less than gross pay.
As an employee, your gross wages are the total amounts you receive from your employer for services rendered. They includes regular hourly wages, overtime pay, back pay, retroactive pay increases, tips, severance pay, salaries, commissions, bonuses, and piecework pay. They also can include benefit days, such as vacation, sick, bereavement, and personal days and holidays. Depending on the type of business and your job description, they can include qualified business expense allowances and reimbursements such as for travel and transportation, and stock appreciation rights. Secured notes you receive from your employer as payment for services, differential wage payments you receive as an active duty member of the military, and, in some cases, employee achievement awards also count as gross wages.
Your taxable wages as an employee are your gross wages minus your allowances, as defined by the IRS, and pretax and nontaxable deductions. For instance, to figure your taxable wages for federal income tax purposes, subtract from your gross wages the total value of your W-4 allowances, your nontaxable wages such as business expense reimbursements, and pretax deductions such as 401(k) contributions. To figure your taxable wages for Social Security tax purposes, subtract from your gross wages any nontaxable wages and pretax deductions that are exempt from Social Security tax. If necessary, ask your payroll department to explain your withholding taxes and the allowances, nontaxable deductions, and pretax deductions that determine your taxable wages.
If you get non-cash taxable fringe benefits or compensation from your employer, they are not counted in your gross wages, but they’re taxable. These types of benefits may include club membership, car leasing, apparel and goods, gift certificates, tickets and passes, rent, moving expenses, and employer-paid bonus taxes. These items don’t show in your gross wages on your pay stub, but they’re included in your taxable gross wages on your W-2.
If you're self-employed rather than an employee, your gross income is all the income you receive in the form of money, property, goods and services. This includes compensation for services such as fees, fringe benefits and commissions. If you receive interests, rents, dividends, property gains, royalties, annuities, pensions, or partner's distributive share of income, count them in your gross income. Also include cancelled debts, unless the debt qualifies for an exclusion from gross income under Internal Revenue Service guidelines.
Adjusted Gross Income
As a self-employed person, your adjusted gross income is your gross income minus your deductions. Such deductions may include individual retirement account contributions, half of your Social Security and Medicare taxes due, post-tax health insurance contributions, student loan interest, alimony payments, and your contributions to a qualified retirement account. After figuring your adjusted gross income, apply the income tax rate in IRS Form 1040-ES that goes with your adjusted gross income and filing status.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.