Gross Pay vs. Net Pay: What Is the Difference?

Gross pay and net pay are fundamental terms on every paycheck. Gross pay represents the total earnings before any deductions. Conversely, net pay is the final amount an employee receives after all withholdings have been subtracted. This difference highlights how total compensation is transformed into the actual take-home amount available for personal use.

Gross Pay Explained

Gross pay is the total compensation an employee earns from an employer before any deductions or taxes are withheld. This figure encompasses various forms of income such as regular wages or salary, overtime pay, bonuses, commissions, and tips. For salaried employees, gross pay is typically their annual salary divided by the number of pay periods in a year, while for hourly workers, it is calculated by multiplying their hourly rate by the hours worked, including any overtime. Gross pay serves as the starting point from which all payroll deductions are calculated.

Deductions from Gross Pay

The transformation from gross pay to net pay occurs through various deductions, which can be categorized as mandatory or voluntary. Mandatory deductions are legally required withholdings from an employee’s paycheck. These include:
Federal income tax, where the amount withheld depends on an employee’s Form W-4.
Social Security tax (FICA), withheld at a rate of 6.2% from wages up to an annual limit, which is $176,100 for 2025.
Medicare tax (FICA), withheld at 1.45% of all wages, with no income limit, and an additional 0.9% Medicare tax applies to earned income exceeding $200,000.
State and local income taxes are also mandatory where applicable, varying by jurisdiction.

Voluntary deductions are those an employee chooses to have withheld from their pay. These can be pre-tax, meaning they are subtracted from gross pay before income taxes are calculated, thereby reducing taxable income. Common examples of pre-tax deductions include contributions to retirement plans like 401(k)s or 403(b)s, health insurance premiums, and flexible spending accounts (FSAs).

Other voluntary deductions are post-tax, meaning they are taken from an employee’s paycheck after all applicable taxes have been withheld. Examples include contributions to a Roth 401(k), which are made with after-tax dollars but allow for tax-free withdrawals in retirement. Other common post-tax deductions can include union dues, certain life insurance premiums, or wage garnishments for debts like child support or unpaid taxes, which, while court-ordered, are typically deducted after taxes.

Net Pay Explained

Net pay, often referred to as “take-home pay,” is the amount of money an employee actually receives after all mandatory and voluntary deductions have been subtracted from their gross pay. This is the final sum that is either deposited into a bank account through direct deposit or issued as a physical check. Net pay represents the disposable income available to an individual for spending, saving, or investing.

Understanding Your Pay Stub

A pay stub serves as a detailed record summarizing an employee’s earnings and deductions for a specific pay period. It typically includes the pay period dates, indicating the span of time covered by the payment, and the pay date, which is when the funds are received. The gross earnings for the period are clearly listed, often broken down by regular wages, overtime, bonuses, or commissions.

An itemized list of all deductions is also prominently displayed, detailing amounts withheld for federal, state, and local taxes, as well as FICA contributions for Social Security and Medicare. Additionally, voluntary deductions for benefits like health insurance premiums, retirement plan contributions, and other elected withholdings are shown. The pay stub concludes with the net pay amount, often highlighted, representing the final take-home pay. Regularly reviewing a pay stub is important to ensure the accuracy of earnings and deductions.