Is Net Pay Before or After Taxes?

When reviewing a paycheck, many individuals wonder about the difference between the total amount earned and the amount actually received. This common confusion often centers on whether net pay is calculated before or after taxes. Understanding the distinction between gross pay and net pay, along with the various deductions that apply, is essential for comprehending one’s earnings.

Understanding Gross Pay

Gross pay represents the total amount an employer agrees to pay an employee before any deductions are taken. It serves as the baseline for all payroll calculations. Gross pay can encompass various forms of compensation. This includes an employee’s base salary or hourly wages, along with additional earnings such as commissions, bonuses, and overtime pay.

For salaried employees, gross pay is typically their annual salary divided by the number of pay periods in a year. Hourly workers calculate gross pay by multiplying their hourly rate by the number of hours worked during a pay period.

Common Payroll Deductions

Deductions are amounts subtracted from an employee’s gross pay, leading to a reduced take-home amount. These deductions fall into two primary categories: mandatory and voluntary. Mandatory deductions are legally required withholdings that employers must collect. These include federal income tax, calculated based on an individual’s income and W-4 form, as well as state and local income taxes where applicable.

Another significant mandatory deduction is Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare. For Social Security, employees pay 6.2% of their earnings up to an annual wage limit, which is $176,100 for 2025. Medicare tax is 1.45% of all covered wages, with no income limit.

Voluntary deductions are optional amounts employees choose to have subtracted from their paychecks. Common examples include health insurance premiums and contributions to retirement plans like a 401(k) or IRA. These deductions, whether mandatory or voluntary, reduce the gross pay amount.

What is Net Pay

Net pay is the amount of money an employee actually receives after all mandatory and voluntary deductions have been subtracted from their gross pay. This figure is often referred to as “take-home pay” because it represents the funds an individual has available to spend or save. The relationship between these payroll components is straightforward: Gross Pay minus Deductions equals Net Pay. This final amount is what is deposited into an employee’s bank account or provided as a physical check.