What Is the Difference Between Gross and Net Salary?

Understanding compensation involves more than just the initial salary figure. The distinction between gross and net salary is a common point of confusion. While job offers highlight gross salary, the net salary—the amount received in a bank account—is often considerably lower. This difference arises from various deductions taken from an employee’s pay. Clarifying gross and net salary, and the factors causing this discrepancy, provides a clearer picture of actual earnings.

Understanding Gross Salary

Gross salary represents the total amount an employer agrees to pay an employee before any deductions. This is the figure typically discussed during job interviews and stated in offer letters. It encompasses all forms of compensation earned over a pay period. This total includes regular wages, commissions, bonuses, and overtime pay. For example, if an employee’s annual salary is $60,000, this is their gross salary. This pre-deduction amount serves as the starting point for calculating all subsequent withholdings.

Understanding Net Salary

Net salary, often called “take-home pay,” is the amount an employee actually receives after all mandatory and voluntary deductions are subtracted from their gross salary. This is the final sum deposited into an employee’s bank account or provided as a physical check. Net salary is always less than gross salary due to these withholdings.

Therefore, its calculation depends on the gross salary and applicable deductions. It reflects the real disposable income an employee has available to spend or save. While gross salary indicates earning potential, net salary reveals the actual funds received.

Key Deductions from Gross Pay

The difference between gross and net salary is primarily due to various deductions applied to an employee’s earnings. These deductions can be mandatory, required by law, or voluntary, chosen by the employee for benefits or savings.

Mandatory Deductions

Federal income tax is a mandatory deduction, withheld from an employee’s gross pay to fund government operations. The amount withheld is determined by information on an IRS Form W-4, which helps employers calculate the correct amount based on filing status. This tax operates on a progressive system, meaning higher earners pay a larger percentage of their income. State and local income taxes also fall under mandatory deductions; however, not all states or localities impose these taxes.

Another mandatory deduction is the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare. Social Security provides benefits for retirees, disabled individuals, and survivors, while Medicare funds health coverage for those aged 65 and over. For 2025, employees typically pay 6.2% for Social Security on earnings up to an annual wage base limit and 1.45% for Medicare on all earned income. An additional Medicare tax of 0.9% applies to wages exceeding certain thresholds ($200,000 for single filers, $250,000 for married filing jointly). Employers also contribute a matching amount to FICA taxes.

Voluntary/Pre-Tax Deductions

Pre-tax deductions are taken from gross pay before federal, state, and some local income taxes are calculated, reducing an employee’s taxable income. This reduction can lead to lower overall tax liability. Common examples include contributions to employer-sponsored retirement plans like a traditional 401(k) or 403(b), where contributions grow tax-deferred until withdrawal in retirement. Health insurance premiums, including medical, dental, and vision coverage, are frequently deducted on a pre-tax basis.

Contributions to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are also common pre-tax deductions. HSAs, available to those with a high-deductible health plan, offer a “triple tax advantage” as contributions are pre-tax, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. FSAs allow employees to set aside pre-tax money for healthcare or dependent care expenses, though these funds typically must be used within the plan year.

Voluntary/Post-Tax Deductions

Post-tax deductions are withheld from an employee’s paycheck after all applicable taxes have been calculated and deducted. These deductions do not reduce an employee’s taxable income. Examples include contributions to a Roth 401(k) or Roth IRA, where contributions are made with after-tax dollars but qualified withdrawals in retirement are tax-free.

Other post-tax deductions can include union dues, certain life or disability insurance premiums, and charitable contributions made through payroll. Wage garnishments, which are court-ordered withholdings to satisfy debts such as child support, alimony, or unpaid taxes, are also post-tax deductions. For child support garnishments, federal law limits the amount that can be withheld, typically between 50% and 65% of disposable earnings.