Final answer:
Gross pay is the total compensation earned by an employee before deductions such as taxes and social security contributions. It's different from net pay, which is the amount after deductions, and is essential for understanding the basics of taxation and payroll accounting.
Step-by-step explanation:
Gross pay refers to the total compensation an employee earns before any deductions, such as taxes or social security contributions, are taken out. Thus, the correct answer to the question is 2) Total compensation earned by an employee before any deductions.
When an employee receives a paycheck, it starts as the gross pay and then is subjected to various deductions. These deductions typically include federal and state income taxes, Social Security taxes, and Medicare taxes. The money that is left after all these deductions is known as net pay or take-home pay. Payroll taxes include both the deductions from an employee's wages, and taxes the employer must pay based on the employee's wages. These employer contributions fund the social security system and other insurance programs.
Also, when contributing to payroll taxes, both the employer and the employee have certain percentages that they must contribute. For Social Security, it's generally 6.2% for each party, and for Medicare, it's 1.45% each. It's important to understand these concepts to follow the basic principles of taxation and payroll accounting and to comply with legal requirements.