How Is Gross Pay Different From Net Pay?

Gross pay and net pay are two fundamental terms used in employment and personal finance, representing different stages of an employee’s earnings. Gross pay signifies the total compensation earned before any reductions are applied. Net pay, conversely, is the actual amount of money an employee receives after all withholdings and deductions have been taken out.

Understanding Gross Pay

Gross pay represents the total amount of money an employee earns from their employer before any deductions are made. For hourly employees, gross pay is calculated by multiplying the hourly rate by the number of hours worked, including any overtime hours at their respective rates. Salaried employees typically have their annual salary divided by the number of pay periods in a year to determine their gross pay per period. Beyond regular wages or salary, gross pay also includes additional earnings such as commissions, bonuses, and tips.

Understanding Net Pay

Net pay is the amount of money an employee actually receives after all mandatory and voluntary deductions are subtracted from their gross pay. This is commonly referred to as “take-home pay” because it is the final sum that is deposited into a bank account or received as a physical check.

Common Payroll Deductions

The transformation from gross pay to net pay occurs through various deductions, which can be categorized as mandatory or voluntary, and further as pre-tax or post-tax. Mandatory deductions include taxes required by law. Federal income tax is withheld from wages based on information provided on an employee’s Form W-4, with the amount varying based on income, filing status, and other factors. State and local income taxes also apply in many jurisdictions.

FICA taxes, which fund Social Security and Medicare, are another mandatory federal deduction. For 2025, the Social Security tax rate is 6.2% on earnings up to a wage base limit of $176,100, while the Medicare tax rate is 1.45% on all earnings, with no wage limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for single filers ($250,000 for joint filers). These FICA contributions are split equally between the employee and employer.

Voluntary deductions can be taken either before or after taxes are calculated. Pre-tax deductions reduce an employee’s taxable income, thereby lowering the amount of federal and often state income tax owed. Common examples include contributions to 401(k) retirement plans, health insurance premiums, and Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs). These deductions are subtracted from gross pay before income tax is computed.

Post-tax deductions, conversely, are withheld from an employee’s paycheck after all applicable taxes have been calculated and deducted. These deductions do not reduce taxable income. Examples include Roth 401(k) contributions, which are taxed upfront but allow for tax-free withdrawals in retirement, union dues, and certain charitable contributions or loan repayments. Wage garnishments, which are court-ordered withholdings for debts like child support or unpaid loans, are also typically post-tax deductions.

Deciphering Your Pay Stub

A pay stub provides a detailed breakdown of an employee’s earnings and deductions for a specific pay period. Typically, the pay stub will clearly display the gross pay at the top, representing the total earnings before any subtractions. Following this, various sections detail the deductions, categorized to show how they reduce the gross amount.

One section usually outlines mandatory tax withholdings, such as federal income tax, state income tax, local income tax, and FICA taxes (Social Security and Medicare). Another section lists pre-tax deductions, which might include health insurance premiums or retirement plan contributions, explicitly showing how these reduce the taxable gross. Further details will indicate post-tax deductions, such as Roth 401(k) contributions or union dues.

Each deduction is itemized with its specific amount for the current pay period. Many pay stubs also include year-to-date (YTD) totals for earnings and deductions, providing a running cumulative total from the beginning of the calendar year. The final figure presented on the pay stub is the net pay, which is the amount actually paid to the employee after all listed deductions are subtracted from the gross earnings. Understanding these components allows an employee to verify their pay and track their financial contributions.