What Is Net Pay and How Is It Calculated?

Net pay represents the compensation an employee receives after all mandatory and voluntary deductions are subtracted from their total earnings. It is commonly referred to as “take-home pay” and is the actual money available for an individual to spend or save. Understanding net pay is important for personal financial planning, as it reflects the spendable income an individual has.

Gross Pay to Net Pay: The Calculation

Gross pay is an individual’s total earnings during a pay period before any deductions are applied. It includes wages, salaries, overtime, bonuses, commissions, and other compensation. For hourly employees, gross pay is calculated by multiplying the hourly rate by hours worked, including overtime. Salaried employees divide their annual salary by the number of pay periods to determine their gross pay for each period.

The transformation from gross pay to net pay involves a straightforward calculation: Gross Pay minus Deductions equals Net Pay. Deductions are amounts withheld from gross earnings. These reduce gross pay to net pay. While gross pay indicates total compensation earned, net pay reflects the amount an employee takes home.

Key Deductions from Gross Pay

Deductions reduce an employee’s gross pay, falling into mandatory and voluntary categories. Mandatory deductions are required by law and include federal income tax, state income tax, and Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare. Federal income tax withholding is determined by information on an employee’s Form W-4.

Social Security tax is currently levied at a rate of 6.2% on wages up to an annual limit, which is $176,100 for 2025. Medicare tax is 1.45% on all covered wages, with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 in a calendar year, withheld only from the employee’s portion. State and local income taxes also vary by jurisdiction and are withheld as required. Beyond taxes, mandatory deductions can also include court-ordered wage garnishments for obligations like child support or unpaid taxes.

Voluntary deductions are those an employee chooses to have withheld from their pay for benefits or savings. Common examples include contributions to health insurance premiums, retirement plans such as a 401(k), and flexible spending accounts. These voluntary deductions can be either pre-tax or post-tax. Pre-tax deductions, like many health insurance premiums and traditional 401(k) contributions, are taken from gross pay before taxes are calculated, reducing taxable income. Post-tax deductions, such as Roth 401(k) contributions or charitable donations, are withheld after taxes have been calculated and do not reduce current taxable income.

Interpreting Your Pay Stub

A pay stub is a document summarizing an employee’s earnings and deductions. It includes pay period dates, the payment date, and employer and employee identification. The pay stub shows gross pay for the current period, along with year-to-date (YTD) gross earnings.

Beneath the gross pay, deductions are itemized. This section details amounts withheld for federal income tax, Social Security, Medicare, state taxes, and voluntary deductions like health insurance or retirement contributions. Each deduction shows both the current period’s amount and the YTD total. The final figure displayed is the net pay, which is the amount deposited or issued to the employee. Regularly reviewing a pay stub allows employees to verify the accuracy of their earnings, deductions, and ensure correct net pay.