Quick facts
- Gross pay is the amount earned before withholding and deductions; net pay is what remains after them.
- IRS Publication 15 (2026): wages subject to federal employment taxes generally include all pay given to an employee for services performed, whether in cash or other forms.
- IRS Publication 15 (2026): the social security wage base limit is $184,500; Medicare tax has no wage base limit.
What it means in practice
For an employer, gross income means an employee's total pay for a pay period before anything is subtracted. It includes regular salary or hourly pay and other compensation such as bonuses, commissions and overtime. Payroll starts from this figure, then subtracts withholding and other deductions to reach take-home pay, which is covered in our entry on net pay.
The IRS explains in Publication 15 (Employer's Tax Guide) that wages subject to federal employment taxes generally include all pay you give an employee for services performed. It says the pay may be in cash or in other forms, lists salaries, vacation allowances, bonuses and commissions as examples, and says the method of measuring or making payments does not matter. Publication 15 also says overtime pay is generally subject to social security and Medicare tax, and that severance payments are wages subject to those taxes, federal income tax withholding and FUTA tax.
Gross pay and taxable wages are not always the same number. The IRS notes that amounts withheld under certain salary reduction agreements are generally excluded from gross income for income tax purposes but remain subject to social security and Medicare taxes. Because different taxes treat the same payment differently, employers should keep gross pay, federal income tax wages and social security and Medicare wages as separate figures and confirm treatment of each payment type in Publication 15 or with a qualified professional.
Tax rules are federal in this entry. States may tax or define wages differently, so check your state revenue or labor department for state income tax and wage-reporting rules.
Example. An employee earns $2,000 in regular pay and a $200 bonus in one pay period. Gross pay for the period is $2,200. Withholding and deductions are then subtracted from that $2,200 to arrive at net pay.
Why it matters and common mistakes
Treating gross pay as only base salary or hourly pay and leaving out bonuses, commissions or other compensation. Publication 15 says wages generally include all pay for services performed, in cash or other forms.
Assuming every payment has the same taxable wage amount. Salary reduction amounts, for example, can be excluded for income tax but remain subject to social security and Medicare taxes, so one gross figure may not apply to every tax.
How Remindax helps
Remindax helps you track the dates and deadlines tied to payroll and compensation record reviews and sends reminders before they're due. Remindax does not provide legal, tax, or HR advisory services, and this page is for general informational purposes only - consult a qualified attorney, accountant, or HR professional for guidance specific to your situation.
Related terms
See all terms in Payroll & Compensation Basics.
Sources & References
- IRS - Publication 15 (2026), Employer's Tax Guide - definition of wages (all pay for services, cash or other forms); overtime and severance subject to employment taxes; social security wage base $184,500 for 2026
- IRS - Topic No. 401, Wages and salary - wages and salaries are included in gross income; salary reduction amounts excluded from income tax but subject to social security and Medicare taxes
Last reviewed: October 2026. Figures are reviewed annually - see Sources & References for current figures.