Whether you are getting ready to file your taxes or just trying to understand your pay stub, knowing the difference between gross wages and taxable wages is important. Once you understand the difference, you can plan your tax strategy more effectively and possibly find new ways to reduce your taxable income.
What are Gross Wages?
Your gross wage is the total amount of money your employer paid you, before taxes or other deductions. If you are salaried and your base pay is $30,000 per year, then your gross pay for the year is $30,000 for the year, plus any bonuses, overtime pay or awards. If you're paid twice a month, then your gross wages for each of the 24 pay periods would be $1,250. If you're paid hourly, you can calculate your gross wages by multiplying the number of hours worked in a pay period such as a week or month by the hourly wage rate.
Gross income Vs Taxable Income
Your taxable wages may be adjusted to lower your tax liability. The easiest example is the money you contribute to your 401(k). The money you put into your 401(k) comes out pretax, which lowers your taxable wages. So if you have gross wages of $50,000 but contribute $10,000 to a 401(k), the amount of your taxable wages drops to $40,000. Since the $40,000 figure is used to compute your federal income tax, the amount you pay in taxes is lower as a result of that 401(k) contribution.
Reporting Gross Pay and Taxable Pay on Form W-2
When you receive your W-2, you can find both your gross wages and your taxable wages. If you did not contribute to a 401(k) or other employer sponsored retirement program such as a 403(b), Simple IRA or a Simplifed Employee Pension Plan, your gross wages and taxable wages will probably be the same. But if you did put money into a 401(k), you will see a different figure for gross wages and taxable wages. For instance, if you earned $40,000 and put 25 percent of your pay into a 401(k), your gross wages will show $40,000 while your federal taxable wages will show only $30,000.
Adjusted Gross Income
When you complete your tax return, you begin by listing the amount of wages shown on your W-2 and other tax documents. You then have the opportunity to enter the tax deductions and credits to which you are entitled. Each deduction and credit lowers the amount of your taxable income, until you are left with your adjusted gross income, which is used to determine your tax liability.
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