What Is the Difference Between Gross Pay and Net Pay?
Navigate your compensation: learn how your earned income translates into the funds you actually receive after necessary adjustments.
When an employer offers a salary or an hourly wage, that figure represents a starting point for compensation. The amount an individual actually receives in their bank account, however, is often different. Understanding the distinctions between these figures is an important step for effective personal financial management. This knowledge allows individuals to accurately budget, plan for savings, and make informed decisions about their earnings.
What is Gross Pay?
Gross pay refers to the total amount of money an employee earns before any deductions are subtracted. It is the agreed-upon compensation for the work performed, representing the complete earnings for a specific pay period.
Gross pay can encompass various forms of remuneration. This includes hourly wages for time worked, an annual salary, overtime pay for hours exceeding the standard workweek, and performance-based incentives like bonuses or commissions. Tips received by employees also contribute to their total gross earnings.
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 commonly referred to as “take-home pay.” It represents funds available for immediate personal expenses, savings, and investments.
Net pay is consistently less than gross pay due to these deductions. The specific amount will vary for each individual, even with the same gross pay, because deductions differ based on personal circumstances and elections. Net pay is the true reflection of an individual’s spendable income from employment.
Understanding Paycheck Deductions
The transformation from gross pay to net pay occurs through a series of deductions, which fall into two main categories: mandatory and voluntary. Employers withhold these deductions and remit them to the appropriate entities.
Mandatory deductions are required by law and include federal income tax withholding. State income tax withholding is also common, depending on the individual’s state of residence, and some localities may have local income taxes. Federal Insurance Contributions Act (FICA) taxes, comprising Social Security and Medicare, are also mandatory. Social Security tax is 6.2% on earnings up to an annual wage base limit ($176,100 for 2025), funding retirement, disability, and survivor benefits. Medicare tax is 1.45% on all earnings, with no wage limit, contributing to health insurance for older adults and certain individuals with disabilities.
Voluntary deductions are those an employee chooses to have withheld from their pay. These can be pre-tax or post-tax. Pre-tax deductions, such as contributions to 401(k) or 403(b) retirement plans, health insurance premiums, Flexible Spending Accounts (FSAs), and Health Savings Accounts (HSAs), reduce an individual’s taxable income, lowering the amount subject to federal and potentially state income taxes. For example, 401(k) contributions are capped by the IRS, with a maximum employee contribution of $23,500 in 2025 for those under age 50.
Post-tax deductions are taken from pay after all applicable taxes have been calculated. Examples include Roth 401(k) contributions, which offer tax-free withdrawals in retirement, and union dues. Other post-tax deductions can include wage garnishments for court-ordered payments like child support or student loans, or elected charitable contributions.
Your Pay Stub: A Practical Guide
A pay stub, also known as an earnings statement, is a detailed document provided by an employer that itemizes an employee’s compensation and deductions for a specific pay period. Reviewing this document regularly ensures accuracy and aids financial planning.
The top section of a pay stub typically displays employee information, such such as name, address, and sometimes an employee identification number. It also indicates the specific pay period dates covered by the payment. Following this, the gross pay amount for the current period is clearly listed.
A detailed breakdown of all deductions is then provided, often categorized by mandatory taxes (federal, state, FICA) and voluntary contributions (like retirement or health insurance premiums), with the amount withheld for each. Finally, the net pay, or take-home amount, is displayed. Most pay stubs also include year-to-date (YTD) totals for gross pay and each deduction, offering a cumulative view of earnings and withholdings.