What Is Net Pay? How to Calculate Your Take-Home Pay
Learn how your gross earnings become your final take-home pay. Understand deductions and factors to accurately calculate your net income.
Net pay is the amount an employee receives after all deductions are subtracted from their total earnings. Often called “take-home pay,” it is the money available for personal financial planning and spending. Understanding net pay is important because it directly reflects the funds an individual has at their disposal.
Gross Pay Versus Net Pay
Gross pay is the total compensation an employee earns before any deductions. This includes salary or hourly wages, overtime, bonuses, or commissions. It serves as the starting point for payroll calculations.
The difference between gross pay and net pay is the subtraction of various withholdings and deductions. Net pay is the amount remaining after these subtractions. The relationship is: Gross Pay – Deductions = Net Pay.
Common Paycheck Deductions
Federal income tax is a mandatory withholding based on an employee’s earnings and the information provided on their Form W-4.
State income tax is another common deduction, though its applicability and rates vary depending on the employee’s state of residence. Some localities also impose local income taxes.
Federal Insurance Contributions Act (FICA) taxes fund Social Security and Medicare. Social Security tax is 6.2% up to an annual wage limit, which is $176,100 for 2025. Medicare tax is 1.45% on all covered wages. An additional 0.9% Medicare tax is withheld from an employee’s wages exceeding $200,000 in a calendar year.
Beyond mandatory taxes, other deductions include health insurance premiums and retirement contributions, such as to a 401(k) or 403(b) plan. Voluntary deductions like life insurance, disability insurance, or union dues may also be taken out, as can court-ordered payments such as wage garnishments or child support.
Variables Influencing Net Pay
Several factors can cause net pay to vary, even when gross pay remains consistent. The information provided on a Form W-4, Employee’s Withholding Certificate, directly impacts the amount of federal and state income tax withheld. Employees complete this form to inform their employer how much federal income tax to withhold from each paycheck, and adjustments to this form can either increase or decrease the amount of tax withheld.
Deductions are categorized as either pre-tax or post-tax, which affects how they influence taxable income and net pay. Pre-tax deductions, such as contributions to a traditional 401(k) or certain health insurance premiums, are subtracted from gross income before taxes are calculated. This reduces the employee’s taxable income, potentially leading to a lower tax liability and a higher net pay compared to post-tax deductions. Post-tax deductions, like Roth 401(k) contributions or some life insurance premiums, are taken out after taxes have already been calculated and withheld, so they do not reduce taxable income.
The frequency of pay periods also influences the amount of net pay received per check. Employees paid weekly receive smaller, more frequent paychecks, while those paid monthly receive larger amounts less often. While the total annual net pay might remain the same, the distribution across paychecks differs. Additionally, the presence or absence of state and local income taxes, which vary by jurisdiction, directly impacts net pay based on an individual’s residency.
Reading Your Pay Stub
Understanding how to read a pay stub is important for verifying the accuracy of your earnings and deductions. A typical pay stub will clearly display your gross pay, which is your total earnings before any subtractions. This section often details your hourly rate and hours worked for hourly employees, or your salary for salaried individuals.
The pay stub will then itemize each deduction taken from your gross pay. This breakdown includes federal income tax, state income tax (if applicable), FICA taxes (Social Security and Medicare), and any voluntary deductions like health insurance premiums or retirement contributions. Each deduction will typically show the amount withheld for the current pay period.
The final amount listed, after all deductions are applied, is your net pay, or the actual amount deposited into your account. Many pay stubs also include year-to-date (YTD) figures for gross pay and each type of deduction. YTD amounts represent the cumulative totals from the beginning of the calendar year to the current pay period, providing a running summary of earnings and withholdings. Regularly reviewing your pay stub helps ensure that your pay rate, hours worked, and deductions are accurate, preventing potential discrepancies or surprises related to your finances.