Gross pay vs net pay: what each means and how to calculate it

The gross pay vs net pay question comes up every time someone looks at a paycheck and wonders where the rest went. The short version: gross pay is your total earnings for the pay period, and net pay is what is left after taxes and deductions, the number that lands in your bank account. The formula is one line: net pay = gross pay − taxes − deductions. The rest of this guide shows what counts in each, walks through a real pay stub line by line, adds a salaried example and an hourly example with overtime, and explains why the same two words mean slightly different things on a W-2, a loan application and a self-employed person’s tax return.

What is gross pay?

Gross pay is the total amount an employer owes you for a pay period before any withholding. If you are hourly, it is your hours multiplied by your rate, plus any premiums. If you are salaried, it is your annual salary divided by the number of pay periods in the year: a $62,400 salary paid semimonthly is $2,600.00 gross per check. Everything that is pay for work, or pay for time your employer agreed to cover, belongs in gross pay:

That last row matters for the example below. Some payroll systems print a reimbursement inside the gross pay total and others print it below net pay. Either way, it is not taxed and it is not part of the wages your employer reports. The IRS says that if the expense is not substantiated, or an advance is not returned, the payment becomes wages under a nonaccountable plan and is taxed like a bonus. For a deeper look at the earnings block, our guide on how to read a pay stub explains every line, and the how to calculate overtime guide covers how bonuses and differentials change the overtime rate.

What is net pay?

Net pay, also called take-home pay, is gross pay minus everything withheld. It is the figure on the check or the direct deposit. What comes out falls into three groups, and the order matters because each group changes the base for the next:

1. Pre-tax deductions, such as a Section 125 health premium, HSA or FSA contributions and a traditional 401(k). They come out first and lower the wages your taxes are figured on.
2. Taxes: Social Security and Medicare (FICA), federal income tax, and state and local income tax where it applies.
3. Post-tax deductions, such as a Roth 401(k), charitable giving, some insurance premiums and wage garnishments. They come out last and do not change your taxes.

So the one-line formula expands to: net pay = gross pay − pre-tax deductions − taxes − post-tax deductions. The gross pay vs net pay gap is different for everyone: the share you keep depends on your pay level, your W-4, your state and which benefits you chose. Two people with identical gross pay can have very different net pay.

Gross pay vs net pay on a real pay stub

Here is the sample stub from our pay stub guide, traced from top to bottom. Emily Carter works in the kitchen at Northfield Coffee in Austin, Texas, at $19.00 an hour, paid biweekly. For November 1–14, 2026 (paid November 20) she worked 72 regular hours, 6 overtime hours in a 46-hour week, took 8 hours of PTO and was reimbursed $86.00 for supplies.

In formula form: $1,777.00 gross − $112.64 pre-tax − $231.48 taxes − $5.00 post-tax = $1,427.88 net. Emily keeps about 80% of gross. Three details are worth noticing:

• Her taxable wages are not $1,777.00. The $86.00 reimbursement is not a wage, so taxes start from $1,691.00.
• Her two taxes use two different bases. The Section 125 premium lowers both federal income tax wages and FICA wages, but the traditional 401(k) deferral lowers only federal income tax wages. So federal income tax is figured on $1,578.36 and Social Security and Medicare on $1,646.00.
• Texas has no state income tax. In most states that line would not be zero.

If you want to see the full stub with the YTD column and employer contributions, it is in the pay stub guide. Employers who need a blank layout can start from our free pay stub templates.

What comes out between gross and net

Pre-tax vs post-tax deductions

A pre-tax deduction is taken from gross pay before taxes are figured, so it lowers your taxable wages and your tax. Health, dental and vision premiums paid through a Section 125 cafeteria plan, HSA and FSA contributions and traditional 401(k) or 403(b) deferrals are the common ones. A post-tax deduction is taken after taxes and does not change them: Roth retirement contributions, charitable giving through payroll, some supplemental insurance, union dues in many plans, and court-ordered garnishments such as child support. On a stub, the pre-tax block always sits above the taxes and the post-tax block below them.

FICA: Social Security and Medicare

FICA is the part of the gap that is the same for almost everyone. The IRS sets the employee rate at 6.2% for Social Security on wages up to $184,500 in 2026 and 1.45% for Medicare on all wages, 7.65% in total (IRS Tax Topic 751). The Social Security Administration has set the 2027 wage base at $192,300, effective January 1, 2027. Employers withhold an extra 0.9% Additional Medicare Tax on wages over $200,000 in a calendar year. Your employer pays a matching 7.65% that never appears as a deduction. Our guide to what FICA is has the full table and the wage-base math.

Federal income tax and the W-4

Federal income tax withholding is the one line you control. Your employer runs your taxable wages through the IRS Publication 15-T withholding tables using what you entered on Form W-4: filing status, whether you have more than one job, dependents, other income and extra withholding. Emily’s $105.56 comes from annualizing $1,578.36 over 26 pay periods, subtracting the $8,600 Step 1 adjustment for a single filer, and applying the 2026 table ($1,240 plus 12% of the amount over $19,900), then dividing by 26. Change the W-4 and the number changes. Our W-4 form guide walks through each step and when to update it.

State and local income tax

Most states withhold their own income tax, some at a flat rate and some with brackets, and a number of cities, counties and school districts add a local tax. Texas, Florida, Washington and a handful of other states have no wage income tax, so that line is $0.00 there. Some states also take small employee contributions for disability insurance or paid family leave. The state that applies is the one where you work, not where the company is headquartered. Check your state revenue department for the current tables.

Two more examples: salaried and hourly with overtime

Both examples use the same 2026 figures as Emily’s stub: 6.2% Social Security, 1.45% Medicare and the Publication 15-T percentage method for a single filer with only Step 1 of the W-4 completed. The names, benefits and the 4% state tax rate are illustrative.

Salaried employee, semimonthly

Renee Alvarez is an office manager on a $62,400 salary, paid semimonthly (24 times a year), so her gross pay is $62,400 ÷ 24 = $2,600.00 per check. She pays $120.00 a check for medical insurance through a Section 125 plan, defers 5% ($130.00) into a traditional 401(k), and works in a state with a flat 4% income tax.

Note what being salaried does and does not change. It fixes the gross pay per check, but it does not decide overtime: a salaried employee is owed overtime unless they meet the exempt employee tests. And it does not change how taxes are figured; the same tables apply to a $2,600 salary check and a $2,600 hourly check.

Hourly employee with overtime, biweekly

Sam Rivera works in the Northfield Coffee kitchen at $18.00 an hour. For the pay period November 15–28, 2026 (paid December 4), he works 44 hours in the first week and 38 in the second, 82 hours in total. Overtime is counted per workweek, not per pay period, so the 4 hours over 40 in week one are overtime at 1.5 × $18.00 = $27.00 even though his two-week total is close to 80. Sam has no benefit deductions and works in Texas.

Overtime is not taxed at a higher rate. It raises gross pay, and the withholding method annualizes the larger check, so a little more federal tax comes out, but the overtime hours are wages like any other. Check your own week with the overtime calculator, then estimate the whole check with the hourly paycheck calculator, which uses the full federal withholding tables rather than a flat percentage.

Quick gross-to-net calculator

This is a rough estimate for one check. It takes a flat 7.65% for FICA and the federal and state percentages you type in. To find your own federal percentage, divide the federal income tax on your last stub by that stub’s taxable wages; Emily’s is $105.56 ÷ $1,578.36, about 6.7%. For a more precise federal figure built from the IRS tables, use the hourly paycheck calculator.

Two simplifications to keep in mind. The calculator applies all pre-tax deductions to the FICA base, while a traditional 401(k) deferral does not reduce FICA wages in real payroll. And it ignores the Social Security wage base, so it overstates FICA for anyone whose year-to-date wages have passed $184,500.

Gross vs net for self-employed workers

For a contractor or sole proprietor the words shift. There is no gross pay, because there is no employer and nothing is withheld. Instead there is gross income (everything clients paid you), net profit (gross income minus business expenses, figured on Schedule C) and then what is left after you pay your own taxes. Because no one withholds for you, the taxes arrive as quarterly estimated payments and a bill at filing time.

The biggest difference from an employee is self-employment tax. The IRS rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, which is both the employee and the employer share of FICA. It applies to 92.35% of net earnings from self-employment, with the Social Security part stopping at the $184,500 wage base for 2026, and you can deduct half of it when figuring adjusted gross income (IRS Tax Topic 554). A contractor with $60,000 of net profit owes it on $55,410, which is $8,477.73, before any income tax. An employee with $60,000 of wages pays $4,590 in FICA and the employer pays the other $4,590. The trade-offs on both sides are in our 1099 vs W-2 guide.

Gross vs net on the W-2: box 1 vs box 3

Your Form W-2 does not show net pay at all, and it does not show gross pay either. It shows taxable wages, and two boxes show two different versions of them:

• Box 1, wages, tips, other compensation: wages subject to federal income tax. The IRS instructions exclude elective deferrals to a 401(k) or 403(b) and pre-tax Section 125 contributions, so box 1 is usually lower than gross pay.
• Box 3, Social Security wages: wages subject to Social Security tax. Elective deferrals are included here, Section 125 premiums are not, and the IRS caps the total of boxes 3 and 7 at $184,500 for 2026. Box 5, Medicare wages, is the same base with no cap.

Emily’s stub shows the gap building during the year. Her year-to-date federal income tax wages are $32,690.76 while her Social Security and Medicare wages are $34,096.00, and the $1,405.24 difference is her 401(k) deferrals. If she had no further changes, those two figures plus her remaining 2026 checks would become her box 1 and box 3. The $86.00 reimbursement appears in neither, because accountable-plan reimbursements are excluded from gross income and not reported on the W-2. For the form itself, its deadline and the new 2026 box 12 codes for overtime and tips, see our W-2 deadline guide.

This is also why “gross income vs net income” on a tax return is a different comparison again. On Form 1040, gross income is all taxable income from every source, adjusted gross income subtracts items such as half of self-employment tax or IRA contributions, and taxable income subtracts the standard or itemized deduction. None of those is your pay stub’s net pay.

Why “gross income” on a loan application means gross pay

Mortgage lenders, landlords, car dealers and credit card issuers ask for gross income, not net, and for an employee with one job that is your gross pay before taxes and deductions. The Consumer Financial Protection Bureau defines the debt-to-income ratio lenders use as all your monthly debt payments divided by your gross monthly income, the amount you have earned before taxes and other deductions are taken out. Using net pay on an application understates your income and can cost you an approval.

To convert, use your pay frequency: biweekly gross × 26 ÷ 12 is monthly gross income; semimonthly gross × 2; weekly gross × 52 ÷ 12. Emily’s regular pay without the reimbursement is $1,691.00, which is about $3,663.83 a month, and a lender will usually ask for a recent stub and last year’s W-2 to confirm it. Gross income can also include other sources, such as a second job, rental income or benefits, if you have them.

Budgeting works the other way around. Rent, groceries and savings come out of net pay, so when you plan a monthly budget, start from the deposit, not the gross figure.

For employers: gross pay is the base for payroll taxes

On the employer’s side, gross pay is where every payroll calculation starts, and getting it right means getting the hours right first. Time clock punches, approved PTO and the per-workweek overtime test produce the earnings lines; the taxes follow from them. Three things to keep straight:

• Employer FICA is figured on FICA wages, not on gross pay. For Emily, that is 7.65% of $1,646.00, which is $125.92 (matching her $102.05 and $23.87), not 7.65% of $1,777.00. Reimbursements under an accountable plan and Section 125 premiums are out of the base; 401(k) deferrals stay in.
• Unemployment taxes have their own, smaller bases. FUTA is 6.0% on the first $7,000 of each employee’s wages, reduced to 0.6% with the full 5.4% state credit, and state unemployment tax uses the state’s own wage base and your assigned rate. Both are employer-paid and never come out of net pay. The full picture, with a worked example, is in our employer payroll taxes guide.
• The money between gross and net is held in trust. Withheld income tax and employee FICA belong to the employee and the IRS, and late deposits carry penalties. Our guide on how to process payroll covers the deposit schedule.

Clear stubs reduce questions. When an employee can see regular hours, overtime, PTO and each deduction as its own line, the gross-to-net gap explains itself. Record hours with a time clock, approve time off through PTO tracking, keep reimbursements in expenses rather than wages, and the stub is built from records the employee already recognizes.

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