Gross Pay vs Net Pay: Where the Money Goes

Two numbers anchor every pay stub: gross pay at the top and net pay at the bottom. The gap between them can be surprisingly large, and understanding it is the fastest way to spot mistakes and plan a budget.

What gross pay includes

Gross pay is everything earned for the pay period before withholding. It can include:

• Regular wages (hours times rate, or the salary for the period)
• Overtime pay
• Bonuses and commissions
• Holiday pay, vacation pay and sick pay
• Reported tips

For a salaried employee, gross pay per period is the annual salary divided by the number of pay periods. For an hourly worker it changes with hours worked. Our guide to hourly vs salaried pay stubs covers both.

What net pay is

Net pay is gross pay minus every tax and deduction. It is the amount that lands in your bank account or appears on the check. It is the number most people budget around, but it can change from one period to the next even when gross pay stays the same, for example when a deduction starts or an annual wage limit is reached.

Where the money goes: the four main buckets

1. Federal income tax

Withheld based on the employee's Form W-4, gross pay, pay frequency and pre-tax deductions. It is an estimate of the income tax owed for the year, settled when the tax return is filed. Read how federal income tax withholding works.

2. FICA: Social Security and Medicare

Social Security is 6.2% of wages up to an annual limit, and Medicare is 1.45% of all wages, with an additional 0.9% withheld on wages above $200,000 in a calendar year. These rates are set by law and do not depend on the W-4. Details are in our FICA guide.

3. State and local taxes

Most states have an income tax, and some cities and counties add their own. A few states also collect employee contributions for disability or paid family leave programs. Because the rules vary, the same gross pay can produce a different net pay in different states.

4. Benefit and other deductions

These include retirement contributions, health, dental and vision premiums, flexible spending or health savings accounts, union dues and court-ordered garnishments. Some are pre-tax and some are after-tax, which affects how much tax is withheld. See pre-tax vs after-tax deductions.

An example from gross to net

For example, take a salaried employee earning $52,000 a year, paid biweekly (26 times a year). Gross pay per period is $2,000. Using illustrative round numbers:

1. Start with gross pay: $2,000
2. Subtract a pre-tax 401(k) contribution of 5%: $100
3. Subtract a pre-tax health premium: $50
4. Subtract Social Security: $2,000 minus the $50 health premium leaves $1,950 subject to FICA; 6.2% of $1,950 is about $121
5. Subtract Medicare: 1.45% of $1,950 is about $28
6. Subtract federal income tax (made-up figure for the example): $140
7. Subtract state income tax (made-up figure): $55

Net pay is roughly $2,000 minus $494, or about $1,506. Notice that the 401(k) contribution lowers the wages used for federal income tax but not the wages used for Social Security and Medicare, while a cafeteria-plan health premium generally lowers both. Your actual numbers will differ, so use this only to understand the flow.

Why net pay changes when gross pay does not

• A new W-4. Changing filing status, dependents or extra withholding changes federal withholding.
• Benefit changes. Open enrollment often changes premiums in January.
• Reaching the Social Security wage limit. High earners stop having Social Security withheld once year-to-date wages pass the annual limit, so net pay rises for the rest of the year.
• Crossing $200,000 in wages. The extra 0.9% Medicare withholding starts and net pay drops slightly.
• Extra pay periods. Some deductions are taken only from certain paychecks. See pay frequency compared.

Tips for checking gross and net

• Add up the earnings lines yourself and confirm they equal gross pay.
• Add up all taxes and deductions and confirm gross minus that total equals net pay.
• Compare this stub's year-to-date totals with the last one. The difference should equal this period's amounts. Our YTD guide shows how.

If your withholding seems too high or too low for your situation, the IRS Tax Withholding Estimator can help, and a tax professional can advise on specifics.

Seeing it on your own stub

With PayStubNest you can create a pay stub and preview it for free. Enter the salary or hours and deductions, and the calculator shows each step from gross to net. The line-by-line guide explains every section you will see.