Gross pay vs. net pay: What’s the difference?
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Updated 2:06 p.m. UTC Oct. 24, 2023
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Gross pay is the amount of money you earn before any payroll deductions are taken out of your paycheck. In contrast, your net pay is the amount of money you take home after deductions like taxes, health insurance premiums and garnishments. You might also hear net pay referred to as ‘take-home pay.’
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What is gross pay?
When you see a job listing, the salary or hourly pay on the job listing is the gross pay, or the pay before taxes and other payroll deductions. If you’re hired, this number may be subject to negotiation and may increase as you’re promoted or receive cost-of-living raises.
How to calculate gross pay
If an employee is on salary, divide the total pay by the number of pay periods in the year to calculate the gross pay per pay period. For example, if the employee earns $81,000 in gross pay on an annual basis and is paid monthly, they would divide $81,000 by 12 to find their gross income per pay period. This would equal $6,750 per month.
Hourly employees must multiply their hourly rate by the number of hours worked in a pay period. Let’s say an hourly employee makes $28 per hour. In a typical two-week pay period, they work 80 hours without overtime. This results in gross pay of $2,240 per pay period. Now, let’s say they worked a 40-hour week for 52 weeks throughout the year. With an hourly rate of $28, their annual gross pay would be $58,240.
What is net pay or take-home pay?
Net pay or take-home pay is the amount of money deposited into an employee’s bank account each pay period. You can calculate it by subtracting payroll deductions from gross pay.
This number is printed on a paycheck after all deductions are listed and subtracted from the employee’s gross pay (earnings).
For example, an employee who is paid $81,000 per year may have to deduct $500 monthly for insurance premiums, bringing their annual net pay down to $75,000. Other deductions may also apply, including mandatory deductions (like Medicare taxes, Medicaid taxes and court-ordered garnishments) and voluntary deductions (such as retirement contributions and commuter benefits).
How to calculate net pay
Net pay accounts for all voluntary and involuntary payroll deductions, such as taxes, benefits and court-ordered payments. Let’s take a look at an example of a salaried employee:
| GROSS PAY | PAYROLL DEDUCTIONS | NET PAY |
|---|---|---|
$3,375
|
| $1,570.82
|
Here’s an example of what a pay stub may look like for an hourly, part-time worker who makes $18 per hour and works 44 hours over a two-week pay period.
| GROSS PAY | PAYROLL DEDUCTIONS | NET PAY |
|---|---|---|
$792
|
| $594.70
|
Common gross pay deductions
There are a myriad of different payroll deductions you might find on a paycheck, and they’re all calculated in a different yet interconnected way.
Income taxes
Income taxes are usually charged at the federal, state and local levels. At the federal level, we have a progressive tax system, meaning that those individuals with a higher income are likely to pay a larger percentage of their gross pay towards income taxes.
At the state level, you may see a graduated- or flat-rate taxation system. Flat-rate systems are less common, but with this type of taxation, your state income tax is a set percentage of your gross pay regardless of income level. There are also a handful of states that do not impose state income taxes at all, including:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
- New Hampshire
In New Hampshire, residents only pay income tax on dividends and interest, and even that expires in 2026. You would not see income tax as a payroll deduction affecting your net income. On top of state income taxes, local income taxes may also be withheld from a paycheck.
FICA taxes
FICA refers to Medicare and Social Security taxes. Employers and employees contribute equally to the total tax burden. The employee portion is 6.2% of gross pay for Social Security taxes and 1.45% of gross pay for Medicare taxes.
Other payroll factors can influence FICA taxable income calculations, too. For example, if an employee earns over $200,000 a year, employers must withhold an additional Medicare tax of 0.9% of the excess wage.
Insurance premiums
Insurance premiums can be for health insurance and other benefits like short-term disability insurance or group life insurance plans. The first $50,000 of coverage on a group life insurance plan is tax-free, but any employer premiums paid for coverage beyond that benchmark are considered taxable income for the employee when it comes to FICA and income tax calculations.
As far as health insurance is concerned, your contributions can be considered either pre- or post-tax deductions. In the vast majority of circumstances, premiums themselves are classified as post-tax deductions, meaning they don’t affect your gross pay calculations but do impact net pay.
“Some employers offer plans like FSAs or HSAs that allow for pre-tax deductions,” explains Lotasha Thomas, CPA and partner at Dillwood Burkel & Millar, LLP. “If it is pre-tax, then the deduction occurs prior to taxes being withheld and reduces your taxable income.”
Read our imputed income guide for more information on pre- and post-tax deductions.
Retirement plan contributions
Retirement plan contributions can also be pre- or post-tax, and the difference can affect the calculations of your income and FICA taxes. Some plans — like 401(k)s, 403(b)s and pensions — are considered pre-tax contributions, which means they reduce your taxable income.
Meanwhile, employer-enabled Roth IRA contributions are post-tax, meaning contributions won’t affect income and FICA taxes calculations. Another way to refer to these accounts is ‘tax-exempt,’ as withdrawals in retirement won’t incur any additional tax burden since the contributions are made with post-tax dollars.
Court-ordered deductions
Court-ordered deductions like child support, alimony and debt payments can affect net pay calculations, too. They are payroll deductions that a judge has ordered, and the way they’re calculated can vary depending on state law.
Child support is a good example. In some states, the amount of child support owed is calculated based on a specific version of net pay.
In Florida, to calculate child support amounts, the state uses net income to calculate the parent’s total obligation. This net pay is calculated after deducting income taxes, FICA taxes, mandatory union dues, retirement account contributions, health insurance premiums that aren’t for the minor child, court-ordered support for other children and spousal support payments. However, expenses like child care, healthcare or health insurance costs for the child are used later on in the process to adjust that number dollar-for-dollar.
In other states like Colorado, child support payments are determined based on gross pay. While taxes and retirement account contributions may not be determining factors, other factors such as childcare expenses, health insurance expenses, alimony and other child support orders can affect the end number.
Thomas says that child support payments are typically post-tax, which means they won’t lower your gross pay for FICA or income tax purposes. Alimony can be a different story when it comes to state income taxes, as there’s more variation among state laws when it comes to its pre- or post-tax status. This status is not only impacted by where the alimony is awarded, though — when matters, too, as the law may have changed since the judgment was issued.
What are the differences between gross pay and net pay
From a bird’s eye view, the differences between gross and net pay are fairly simple. Gross pay is all pay reported on your pay stub, like wages, commissions, bonuses and reimbursements. Net pay is what’s left over after all payroll deductions have been applied.
However, different government agencies may measure net pay with unique exclusions when considering factors such as taxable income and child support, thereby adding a layer of nuance to gross pay versus net pay definitions.
Gross pay and net pay trends and changes
Thomas says there are changes every year that affect net pay as the wage base for Social Security taxes is reevaluated on an annual basis. Usually, this change is 3% to 4%, but in 2023, it shot up to nearly 9% (from $147,000 to $160,200). That means the first $160,200 you earn in income will be taxed at the standard 6.2% rate, and every dollar you earn after that won’t incur the tax at all.
FICA rates are adjusted far less often, according to Thomas. One of the last times we saw changes to rates was in the aftermath of the 2008 recession. In an attempt to stimulate the economy, Congress passed legislation that reduced the employee portion of Social Security taxes down to 4.2% for the 2011 and 2012 tax years. The latest change to FICA tax rates was in 2013, when income above $200,000 for single filers started incurring an additional 0.9% Medicare tax, for a grand total of 1.54% on that portion of the income.
The table below shows how various changes would have affected an employee with an income of $150,000 who maxed out their 401(k) with no other pre-tax deductions over the years, including the effects of changes to FICA structures and tax bracket changes. For simplicity’s sake, we’re assuming this employee is single, has no dependents and is not taking any other above-the-line deductions.
| YEAR | 401(K) CONTRIBUTION | GROSS INCOME | MAXIMUM INCOME SUBJECT TO SOCIAL SECURITY TAX | FICA TAX BURDEN | INCOME TAX BURDEN |
|---|---|---|---|---|---|
| 2008 | $15,500
| $134,500.00
| $102,000
| $8,274.25
| $29,132.25
|
| 2010 | $16,500
| $133,500
| $106,800
| $8,557.35
| $28,471.25
|
| 2011 | $16,500
| $133,500
| $106,800
| $6,421.35
| $28,337.00
|
| 2012 | $17,000
| $133,000
| $110,100
| $6,552.90
| $27,970.50
|
| 2013 | $17,500
| $132,500
| $113,700
| $8,970.65
| $27,593.25
|
| 2019 | $19,000
| $131,000
| $132,900
| $10,021.50
| $22,686.50
|
| 2022 | $20,500
| $129,500
| $147,000
| $9,906.75
| $21,807.50
|
| 2023 | $22,500
| $127,500
| $160,200
| $9,753.75
| $20,678.40
|
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Starting at $40 plus $6 per month per employee
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Frequently asked questions (FAQs)
Whether you’re salaried or hourly, your gross pay is the amount shown on your pay stub before any deductions. If you’re salaried, this number may be a little easier to calculate as you get paid in equal portions throughout the year outside of any commissions or bonuses. As an hourly employee, to calculate gross pay, you must multiply the hours you worked in any given pay period by your hourly pay rate.
Common gross pay deductions include:
- Federal, state and local income tax withholdings.
- Social Security and Medicare taxes.
- Retirement account contributions.
- Insurance premiums and HSA or FSA contributions.
- Court-ordered payments, such as those for child support, alimony, credit card debt or unpaid taxes.
To calculate take-home pay, subtract all the payroll deductions from your gross pay (total income earned). Each line item will likely have its own unique calculations (such as withholding percentages based on your tax bracket). However, once you have the totals for each deduction, the math is fairly straightforward.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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