Gross vs Net Pay: What's the Difference and How to Calculate Each (2026)
Gross pay is your total earnings before deductions. Net pay is your take-home pay after taxes and deductions. Learn the difference, how each is calculated, and what affects your paycheck.
Gross Pay vs Net Pay — Key Facts
| Term | Definition |
|---|---|
| Gross pay | Total earnings before any deductions — includes wages, salary, overtime, bonuses, commissions, and tips |
| Net pay | Take-home pay after all deductions — the amount deposited into the employee's bank account |
| Pre-tax deductions | Amounts subtracted from gross pay before taxes are calculated (401(k) contributions, health insurance premiums, HSA contributions, FSA contributions) |
| Mandatory deductions | Federal income tax, Social Security tax (6.2%), Medicare tax (1.45%), state income tax, local income tax |
| Post-tax deductions | Amounts subtracted after taxes are calculated (Roth 401(k) contributions, garnishments, union dues, certain insurance premiums) |
| 2026 Social Security tax rate | 6.2% on wages up to $184,500 |
| 2026 Medicare tax rate | 1.45% on all wages (plus 0.9% Additional Medicare Tax on wages over $200,000) |
| 2026 standard deduction | $16,100 (single) / $32,200 (married filing jointly) |
| Where to find your gross pay | Form W-2, Box 1 (wages, tips, other compensation) or Box 3/5 (Social Security/Medicare wages) |
| Where to find deductions | Pay stub — itemized listing of all withholdings and deductions |
| Sources: IRS — Topic No. 401 | IRS — Publication 15 (Circular E) | IRS — 2026 Tax Inflation Adjustments | SSA — Contribution and Benefit Base | |
What Is Gross Pay?
Gross pay is an employee’s total compensation before any taxes, deductions, or withholdings are subtracted. Gross pay represents the full amount an employer agrees to pay the employee and is the starting point for calculating all payroll deductions and the employee’s net (take-home) pay.
For hourly employees, gross pay is calculated by multiplying the hourly rate by the number of hours worked in the pay period. If the employee works overtime (more than 40 hours in a workweek for non-exempt employees), gross pay includes overtime compensation at the FLSA-required rate of at least one and one-half times the employee’s regular rate of pay. For salaried employees, gross pay is the predetermined salary amount for the pay period (annual salary divided by the number of pay periods per year).
Gross pay includes all forms of compensation: regular wages or salary, overtime pay, bonuses, commissions, tips, shift differentials, holiday pay, and any other taxable compensation. According to the IRS, all wages, salaries, and tips received for performing services as an employee must be included in gross income, including amounts withheld for taxes.
Gross pay is reported on the employee’s Form W-2 at year end. Box 1 of Form W-2 shows wages, tips, and other compensation subject to federal income tax. Box 3 shows Social Security wages, and Box 5 shows Medicare wages and tips. These amounts may differ because certain pre-tax deductions (such as 401(k) contributions) reduce Box 1 but not Boxes 3 and 5.
Sources: IRS — Topic No. 401, Wages and Salaries | IRS — Publication 525, Taxable and Nontaxable Income | IRS — Publication 15 (Circular E)
What Is Net Pay?
Net pay is the amount of money an employee actually receives after all mandatory and voluntary deductions are subtracted from gross pay. Net pay is commonly referred to as “take-home pay” because it represents the amount deposited into the employee’s bank account or received on their paycheck.
Net pay is always less than gross pay because federal and state tax withholding, Social Security tax, Medicare tax, and any other deductions are subtracted before the employee receives payment. The difference between gross pay and net pay represents the total of all deductions withheld during the pay period.
The formula for calculating net pay is: Net Pay = Gross Pay − Pre-Tax Deductions − Tax Withholdings − Post-Tax Deductions.
Net pay is not directly reported on the employee’s Form W-2. The W-2 reports gross taxable wages and the amounts withheld for federal income tax (Box 2), Social Security tax (Box 4), and Medicare tax (Box 6), but does not report the final net amount the employee received. Net pay appears on the employee’s pay stub for each pay period.
Sources: IRS — Publication 15 (Circular E) | IRS — Topic No. 401, Wages and Salaries
Gross vs Net Pay: Key Differences
| Feature | Gross Pay | Net Pay |
|---|---|---|
| Definition | Total earnings before deductions | Take-home pay after all deductions |
| Includes taxes? | Taxes have not yet been subtracted | All applicable taxes have been subtracted |
| Includes deductions? | No deductions applied | All pre-tax and post-tax deductions applied |
| Used for | Calculating tax withholding, loan applications, salary negotiations, benefits eligibility | Actual amount received by the employee |
| Reported on W-2 | Yes (Box 1: taxable wages; Box 3: SS wages; Box 5: Medicare wages) | Not reported on W-2 (appears on pay stubs) |
| Always higher? | Yes — gross pay is always equal to or greater than net pay | Always lower than gross pay (unless employee has zero deductions, which is rare) |
| Formula | Hourly rate × hours worked + overtime + bonuses + commissions | Gross pay − pre-tax deductions − taxes − post-tax deductions |
| Synonym | Total compensation, total earnings, pre-tax pay | Take-home pay, after-tax pay |
| Sources: IRS — Publication 15 (Circular E) | IRS — Topic No. 401 | ||
What Deductions Come Out of Gross Pay?
Several categories of deductions are subtracted from gross pay to arrive at net pay. These deductions fall into three groups: pre-tax deductions, mandatory tax withholdings, and post-tax deductions.
Pre-Tax Deductions (Subtracted Before Taxes Are Calculated)
Pre-tax deductions reduce an employee’s taxable income, which lowers the amount of federal and state income tax withheld. Common pre-tax deductions include traditional 401(k) or 403(b) contributions (up to $24,500 for 2026, plus catch-up amounts for eligible employees), health insurance premiums paid through an employer-sponsored plan, Health Savings Account (HSA) contributions (up to $4,400 for self-only coverage or $8,750 for family coverage in 2026), Flexible Spending Account (FSA) contributions (up to $3,400 for 2026), dependent care FSA contributions, and commuter/transit benefits.
Pre-tax deductions reduce the amount shown in Box 1 of Form W-2 but generally do not reduce Social Security and Medicare wages (Boxes 3 and 5), with the exception of Section 125 cafeteria plan contributions.
Mandatory Tax Withholdings
Federal income tax is withheld based on the employee’s Form W-4 elections and the IRS withholding tables published in Publication 15-T. The amount withheld depends on filing status, number of dependents, additional withholding requested, and the employee’s taxable wages for the pay period.
Social Security tax (OASDI) is withheld at a rate of 6.2% on wages up to the Social Security wage base of $184,500 for 2026. The employer pays a matching 6.2%. Once an employee’s cumulative wages for the year exceed $184,500, no additional Social Security tax is withheld for the remainder of the year.
Medicare tax is withheld at a rate of 1.45% on all wages with no wage base limit. The employer pays a matching 1.45%. An Additional Medicare Tax of 0.9% is withheld on wages exceeding $200,000 in a calendar year — the employer does not match this additional amount.
State income tax is withheld in states that impose a state income tax. As of 2026, nine states do not impose a state income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Local income tax is withheld in certain cities and counties that impose local income taxes, including New York City, Philadelphia, and numerous municipalities in Ohio, Pennsylvania, Maryland, and other states.
Post-Tax Deductions (Subtracted After Taxes Are Calculated)
Post-tax deductions do not reduce taxable income — they are subtracted from pay after all taxes have been calculated. Common post-tax deductions include Roth 401(k) or Roth 403(b) contributions, wage garnishments (child support, student loan default, tax levies, creditor judgments), union dues, certain life insurance or disability insurance premiums, charitable contributions through payroll deduction, and after-tax employee stock purchase plan contributions.
Sources: IRS — Publication 15 (Circular E) | IRS — 2026 Tax Inflation Adjustments | IRS — 401(k) Limit Increases to $24,500 for 2026 | SSA — Contribution and Benefit Base
How to Calculate Net Pay from Gross Pay
Calculating net pay from gross pay involves a step-by-step process of subtracting deductions in the correct order.
Step 1: Determine Gross Pay
For hourly employees: multiply the hourly rate by hours worked. Add overtime pay (hours over 40 × 1.5 × regular rate for non-exempt employees). Add any bonuses, commissions, or tips.
For salaried employees: divide the annual salary by the number of pay periods (26 for biweekly, 24 for semi-monthly, 12 for monthly). Add any bonuses or commissions for the pay period.
Step 2: Subtract Pre-Tax Deductions
Subtract traditional 401(k) or 403(b) contributions, health insurance premiums (employer-sponsored plan), HSA contributions, FSA contributions, and any other pre-tax amounts. The result is taxable gross pay.
Step 3: Calculate and Subtract Federal Income Tax
Use the employee’s Form W-4 and the IRS withholding tables in Publication 15-T to determine the federal income tax withholding amount for the pay period based on taxable gross pay, filing status, and allowances.
Step 4: Calculate and Subtract FICA Taxes
Subtract 6.2% for Social Security tax (on wages up to $184,500 cumulative for the year). Subtract 1.45% for Medicare tax (on all wages). If the employee’s cumulative wages exceed $200,000 for the year, subtract an additional 0.9% for the Additional Medicare Tax.
Step 5: Subtract State and Local Income Taxes
Apply the applicable state withholding rate(s) and any local income tax based on the employee’s work location and state withholding certificate.
Step 6: Subtract Post-Tax Deductions
Subtract Roth 401(k) contributions, wage garnishments, union dues, and any other post-tax deductions.
Step 7: Result = Net Pay
The remaining amount after all deductions is the employee’s net pay (take-home pay) for the pay period.
Example Calculation
An employee earns $75,000 annual salary, is paid biweekly (26 pay periods), single filing status, contributes 6% to a traditional 401(k), and pays $150/period for health insurance premiums. The employee works in a state with a 5% flat income tax.
| Step | Calculation | Amount |
|---|---|---|
| Gross pay per period | $75,000 ÷ 26 | $2,884.62 |
| 401(k) contribution (6%) | $2,884.62 × 0.06 | −$173.08 |
| Health insurance premium | Pre-tax deduction | −$150.00 |
| Taxable gross pay | $2,884.62 − $173.08 − $150.00 | $2,561.54 |
| Federal income tax (estimated) | Based on W-4 and Pub 15-T tables | −$273.00 |
| Social Security tax | $2,884.62 × 0.062 | −$178.85 |
| Medicare tax | $2,884.62 × 0.0145 | −$41.83 |
| State income tax (5%) | $2,561.54 × 0.05 | −$128.08 |
| Net pay (take-home) | $2,561.54 − $273.00 − $178.85 − $41.83 − $128.08 | $1,939.78 |
In this example, the employee’s gross pay per period is $2,884.62 and the net pay is approximately $1,939.78 — a difference of $944.84 in total deductions per pay period. Note that Social Security and Medicare taxes are calculated on gross wages (before the 401(k) deduction), not on taxable gross pay.
Sources: IRS — Publication 15 (Circular E) | IRS — Publication 15-T, Federal Income Tax Withholding Methods | SSA — Contribution and Benefit Base
Gross Income vs Net Income
The terms “gross income” and “net income” are used in both payroll and tax contexts, but the meaning differs depending on the context.
Payroll Context
In a payroll context, gross income and gross pay are synonymous — they refer to total earnings before deductions. Net income and net pay are also synonymous — they refer to take-home pay after all deductions.
Tax Return Context
On a federal income tax return (Form 1040), “gross income” has a broader meaning. According to IRC Section 61, gross income is defined as all income from whatever source derived, including wages, salaries, tips, interest, dividends, capital gains, business income, rental income, retirement distributions, and other forms of taxable income. This is the total reported on line 9 of Form 1040 before any adjustments.
“Adjusted gross income” (AGI) is gross income minus certain above-the-line deductions (reported on Schedule 1), such as educator expenses, student loan interest, IRA contributions, self-employment tax deduction, and the deduction for one-half of self-employment tax. AGI is reported on line 11 of Form 1040.
“Taxable income” is AGI minus either the standard deduction ($16,100 for single filers, $32,200 for married filing jointly in 2026) or itemized deductions. Taxable income is the amount on which federal income tax is calculated.
The IRS does not use the term “net income” on individual tax returns. The closest equivalent is taxable income — the amount remaining after all deductions and exemptions.
Self-Employment Context
For self-employed individuals, gross income from a business is total revenue before expenses. Net income (net profit) is gross revenue minus ordinary and necessary business expenses, reported on Schedule C (Form 1040). Self-employment tax is calculated on 92.35% of net self-employment earnings.
Sources: IRS — Adjusted Gross Income | IRS — Definition of Adjusted Gross Income | IRS — Topic No. 401 | IRS — What Is Taxable and Nontaxable Income? | IRS — 2026 Tax Inflation Adjustments
Why Your Gross Pay and Net Pay Differ
The gap between gross pay and net pay exists because of mandatory tax withholdings and voluntary deductions. The size of the gap depends on several factors.
Filing status and dependents determine the amount of federal income tax withheld. Employees who claim more dependents on Form W-4 generally have less tax withheld, resulting in higher net pay. Employees who claim fewer dependents or request additional withholding have more tax withheld and lower net pay.
State of residence affects net pay because state income tax rates vary. Employees in states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) retain more of their gross pay. Employees in high-tax states may see a larger gap between gross and net pay.
Pre-tax retirement contributions reduce taxable income, which lowers federal and state income tax withholding. However, 401(k) and 403(b) contributions do not reduce Social Security or Medicare tax withholding (except for certain Section 125 cafeteria plan contributions).
Health insurance premiums paid through an employer-sponsored plan are typically deducted pre-tax under a Section 125 cafeteria plan, reducing taxable income.
Wage garnishments for child support, student loans, tax levies, or creditor judgments are mandatory post-tax deductions that reduce net pay.
Wage level affects the FICA tax burden. Social Security tax (6.2%) applies only up to the wage base ($184,500 for 2026). Employees earning above this threshold stop paying Social Security tax on wages above the cap, which increases their net pay for the remainder of the year. The Additional Medicare Tax (0.9%) applies only to wages above $200,000, increasing the FICA burden for higher earners.
Sources: IRS — Publication 15 (Circular E) | IRS — Tax Withholding Estimator
Frequently Asked Questions
What is gross pay?
Gross pay is an employee’s total earnings before any taxes, deductions, or withholdings are subtracted. Gross pay includes regular wages or salary, overtime pay, bonuses, commissions, tips, and any other taxable compensation. According to the IRS, all wages, salaries, and tips received for performing services as an employee must be included in gross income.
What is net pay?
Net pay is the amount an employee actually receives after all mandatory and voluntary deductions are subtracted from gross pay. Net pay is commonly called “take-home pay” and is the amount deposited into the employee’s bank account. Net pay equals gross pay minus pre-tax deductions, federal and state income tax withholding, Social Security tax, Medicare tax, and any post-tax deductions.
What is the difference between gross and net pay?
Gross pay is total earnings before deductions. Net pay is take-home pay after all deductions. The difference between the two consists of federal income tax withholding, Social Security tax (6.2%), Medicare tax (1.45%), state and local income taxes, and any voluntary pre-tax or post-tax deductions such as retirement contributions, health insurance premiums, and wage garnishments.
What is gross income?
In a payroll context, gross income is the same as gross pay — total earnings before deductions. In a tax context, gross income is broader and includes all income from any source, including wages, interest, dividends, capital gains, and business income, as defined by IRC Section 61.
What is net income?
In a payroll context, net income is the same as net pay — take-home pay after all deductions. In a tax context, the IRS does not use the term “net income” on individual returns. The closest equivalents are adjusted gross income (AGI), which is gross income minus above-the-line deductions, and taxable income, which is AGI minus the standard deduction or itemized deductions.
What is net payroll?
Net payroll refers to the total amount an employer distributes to employees after all deductions have been withheld. For an individual employee, net payroll is the same as net pay. For a business, net payroll is the sum of all employee net pay amounts for a given pay period.
What is gross paycheck?
A gross paycheck refers to the total (pre-deduction) amount earned by an employee during a pay period. The term is commonly used to describe the total compensation before taxes and other withholdings are applied.
How do I convert gross to net salary?
To convert gross salary to net salary, subtract pre-tax deductions (401(k), health insurance, HSA), federal income tax withholding (based on Form W-4 and IRS tables), Social Security tax (6.2% on wages up to $184,500), Medicare tax (1.45% on all wages), state income tax, local income tax, and post-tax deductions. The result is net salary. The IRS Tax Withholding Estimator at irs.gov can help estimate federal income tax withholding.
What deductions come out of my paycheck?
Mandatory deductions include federal income tax, Social Security tax (6.2%), Medicare tax (1.45%), and state/local income taxes. Common voluntary deductions include retirement plan contributions (401(k), 403(b)), health insurance premiums, HSA and FSA contributions, life and disability insurance premiums, union dues, and charitable contributions. Court-ordered deductions such as child support and wage garnishments are also subtracted.
Why is my net pay so much lower than my gross pay?
The gap between gross and net pay is created by tax withholdings and deductions. Federal income tax is typically the largest withholding, followed by FICA taxes (7.65% combined Social Security and Medicare), state income tax, and voluntary deductions like retirement contributions and health insurance. Employees in high-tax states or those making significant retirement contributions will see a larger gap between gross and net pay.
Official Government Sources
All information on this page is compiled exclusively from official U.S. government (.gov) sources:
- IRS — Topic No. 401, Wages and Salaries
- IRS — Publication 15 (Circular E), Employer’s Tax Guide (2026)
- IRS — Publication 15-T, Federal Income Tax Withholding Methods
- IRS — Publication 525, Taxable and Nontaxable Income
- IRS — What Is Taxable and Nontaxable Income?
- IRS — Adjusted Gross Income
- IRS — Definition of Adjusted Gross Income
- IRS — 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- IRS — 2026 Tax Inflation Adjustments
- IRS — Tax Withholding Estimator
- IRS — Federal Income Tax Rates and Brackets
- SSA — Contribution and Benefit Base
Update History
March 2026: Initial publication. All URLs verified functional.