Is Your Gross Pay Before or After Taxes?
Gain clear insight into your earnings. Understand how your total pay becomes your take-home amount after various deductions.
Understanding your earnings can seem complicated, especially when looking at a pay stub. The journey from the money your employer pays you to the amount that arrives in your bank account involves several steps. Various factors influence how much money you ultimately receive, making it helpful to understand each component of your compensation.
Defining Gross Pay
Gross pay represents the total amount of money an employer agrees to pay an employee before any deductions are taken out. This figure encompasses all earnings for a given pay period, including wages for hours worked, a fixed salary, commissions earned from sales, and any bonuses received.
Understanding Paycheck Deductions
These subtractions fall into two main categories: mandatory deductions and voluntary deductions. Mandatory deductions include various taxes. Federal income tax is withheld based on information provided on your IRS Form W-4, which you complete when starting a new job.
Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes, are also withheld. Social Security tax is 6.2% of your gross pay up to an annual wage base limit. Medicare tax is 1.45% of your gross wages, with no income limit. An additional Medicare tax of 0.9% applies to earnings exceeding certain thresholds, solely paid by the employee. State and local income taxes are withheld where applicable, varying based on your residence and work location.
Voluntary deductions are taken from your pay. Common examples include premiums for health, dental, or vision insurance plans, which often reduce your taxable income if they are pre-tax deductions. Contributions to retirement accounts, such as a 401(k) plan, are another frequent voluntary deduction, often made pre-tax to lower your current taxable income. Other voluntary deductions can include union dues or contributions to flexible spending accounts.
Calculating Your Net Pay
Net pay is the amount of money you actually receive after all mandatory and voluntary deductions have been subtracted from your gross pay. This figure is also known as “take-home pay.” It represents the funds that are deposited into your bank account or provided to you as a physical check. Your gross pay minus the sum of all deductions equals your net pay.
Reading Your Pay Stub
A pay stub or earnings statement provides a breakdown of your compensation for a specific pay period. This document lists your gross pay, typically located at the top or in a prominent section, indicating your total earnings before any subtractions.
Below the gross pay, you will find a list of all deductions taken out. Each mandatory tax withholding, such as federal income tax, Social Security, and Medicare, will be identified. Voluntary deductions, like health insurance premiums or 401(k) contributions, are also listed. Your net pay is typically displayed at the bottom of the statement.