Gross Pay vs. Net Pay: What's the Difference? (2026)
Gross pay vs. net pay explained for hourly workers: the formula, the order taxes and deductions come out, and one worked example from gross to take-home.
Disclaimer: Informational only, not tax, legal, or financial advice. Rules and rates can change; check current IRS/state guidance or consult a professional.
Quick Answer: Gross Pay vs. Net Pay
Gross pay is what you earn. Net pay is what you keep.
Gross pay is your hours times your rate, plus any overtime, before anything is taken out. Net pay, also called take-home pay, is what is left after taxes and deductions are withheld. The formula is short:
Gross Pay − Taxes − Deductions = Net Pay
That offer letter that says $25 an hour describes gross pay. The number that hits your account on payday is net pay, and for most hourly workers it runs about 70% to 80% of gross.
What Is Gross Pay?
Gross pay is the total you earn in a pay period before any withholding. For an hourly worker, it is straightforward math.
Gross Pay = (regular hours × rate) + (overtime hours × rate × 1.5)
Say you work 45 hours in a week at $20 an hour. The first 40 hours are regular pay, and the extra 5 hours are overtime. Under the Fair Labor Standards Act, hours over 40 in a workweek are paid at one and a half times your regular rate.
- Regular: 40 × $20 = $800
- Overtime: 5 × $20 × 1.5 = $150
- Gross pay: $950
Overtime is figured per workweek, not averaged across a pay period. A 45-hour week followed by a 35-hour week still earns 5 hours of overtime in that first week. The FLSA does not require extra pay for weekends or holidays on its own; the only trigger is crossing 40 worked hours in the week.
Salaried workers have gross pay too. Divide the annual salary by the number of pay periods. A $52,000 salary paid biweekly is $2,000 in gross pay per check (52,000 ÷ 26).
Gross pay can also include tips, bonuses, and commissions. All of it is the starting point. Nothing has been subtracted yet.
What Is Net Pay?
Net pay is what remains after every required tax and every deduction comes out of gross pay. It is the deposit on your pay stub, the money you can actually spend.
People use net pay and take-home pay interchangeably, and they mean the same thing. If your stub shows $950 gross and $720 net, then $230 went to taxes and deductions and $720 is yours.
Net pay feels low because the subtractions stack up. Some are mandatory, like Social Security and Medicare. Others are voluntary, like a retirement contribution. They do not all come out at the same stage either, which is the part most explanations skip.
What Comes Out Between Gross and Net
The jump from gross to net is not one subtraction. It is a sequence, and the order matters because earlier subtractions shrink the amount that later taxes are calculated on. Payroll runs the steps in roughly this order, as outlined in ADP’s payroll deductions guide.
Step 1: Pre-tax deductions
Pre-tax deductions come out first, before any tax is figured. The two common ones are traditional 401(k) contributions and Section 125 health insurance premiums.
These matter because they lower the wages your taxes are based on. A pre-tax health premium reduces both your income tax and your FICA. A traditional 401(k) contribution reduces your federal income tax but not your FICA, so Social Security and Medicare are still calculated on the amount you put into the plan.
Step 2: Federal income tax
Next comes federal income tax withholding. This is based on your W-4, your filing status, and your earnings after the pre-tax deductions came out. It uses a progressive bracket system, so higher earnings are taxed at higher marginal rates.
Step 3: FICA (Social Security and Medicare)
FICA is the flat payroll tax that funds Social Security and Medicare. The employee share is 7.65%, broken into:
- Social Security: 6.2% on wages up to the annual wage base, which is $184,500 for 2026 per the IRS
- Medicare: 1.45% on all wages, with no cap
High earners pay an extra 0.9% Medicare tax on wages over $200,000 (single or head of household), and the employer does not match that portion.
Step 4: State and local income tax
If your state has an income tax, it comes out next. Rates vary widely, and nine states have no wage income tax at all. Some cities add a local tax on top.
Step 5: Post-tax deductions
Last are post-tax deductions, taken after taxes are settled. Roth 401(k) contributions, wage garnishments, union dues, and some insurance add-ons fall here. They reduce your net pay but do not lower your taxable income.
After all five steps, what remains is net pay.
A Worked Example: From Gross to Net
Numbers make the order concrete. Take a single filer who earns $950 in a weekly gross check and contributes $50 to a traditional 401(k). The state has no income tax. Estimated figures below are for illustration; your real withholding depends on your W-4 and state.
- Gross pay: $950
- Pre-tax 401(k): −$50, leaving $900 for income tax purposes
- Federal income tax (estimated ~10%): about −$90
- Social Security (6.2% of $950, since 401(k) does not reduce FICA): about −$58.90
- Medicare (1.45% of $950): about −$13.78
- State tax: $0 in this example
- Net pay: roughly $737
Notice two things. FICA was figured on the full $950, not the $900, because the 401(k) only shelters income tax. And the $50 you set aside for retirement is still yours; it went to your account, just not your checking account.
Run the same paycheck in a state with a 5% income tax and net pay drops by roughly another $45. Add a $40 pre-tax health premium and your income tax and FICA both shrink slightly, nudging net pay back up relative to a post-tax version of the same premium. Small order-of-operations details move the final number.
If you would rather not do this by hand, ClockWage44 logs your shifts across one or more jobs and runs the same federal tax, state tax, FICA, and deduction math to show your take-home pay to the cent. You can compare gross and net side by side with the free calculators or read more in the blog.
Why Gross Pay vs. Net Pay Matters
Mixing up the two terms leads to real budgeting mistakes. Here is where each one belongs.
Budget with net pay. Net pay is the money you can actually spend. Building a budget on gross pay overstates your income by the full amount of taxes and deductions, often hundreds of dollars per check.
Lenders often look at gross pay. Mortgage and loan qualification usually runs on gross income, which is why a loan officer may approve a payment that feels tight against your real take-home. Know both numbers before you sign.
Offer letters quote gross. A job posting at $60,000 or $25 an hour is quoting gross. Estimate the net before you compare two offers, especially across states with different income taxes.
Check your withholding. If your net pay seems off, the IRS Tax Withholding Estimator can tell you whether too much or too little federal tax is coming out, so you can adjust your W-4.
Know the gap, and you plan around the money you actually have instead of money that was already spoken for.
Frequently Asked Questions
Is take-home pay the same as net pay?
Yes. Net pay and take-home pay mean the same thing: the amount that actually lands in your bank account after every tax and deduction comes out of your gross pay.
How do I calculate net pay from gross pay?
Start with gross pay, subtract pre-tax deductions, then subtract federal income tax, FICA, and state and local tax, then subtract any post-tax deductions. What is left is your net pay.
Why is the gap between my gross and net pay so big?
FICA alone takes 7.65% of your wages, and federal and state income tax often add 10% to 25% more. Once benefit deductions are included, most workers take home roughly 70% to 80% of their gross pay.
Is gross pay before or after taxes?
Gross pay is before taxes. It is the full amount you earn from hours times rate plus any overtime, before a single dollar of tax or deduction is withheld.
Do 401(k) contributions reduce my taxable pay?
A traditional 401(k) contribution lowers the wages your federal income tax is figured on, so it cuts your income tax. It does not reduce FICA, because Social Security and Medicare are still calculated on the contribution.
Should I budget using gross pay or net pay?
Budget with net pay. Net pay is the money you can actually spend, while gross pay overstates what you have by the full amount of taxes and deductions.
What percentage of gross pay is net pay?
For most hourly W-2 workers, net pay is about 70% to 80% of gross pay. The exact share depends on your state, filing status, and how much you put toward benefits like health insurance and retirement.
References
- IRS: Topic No. 751, Social Security and Medicare Withholding Rates
- U.S. Department of Labor: Fact Sheet #23: Overtime Pay Requirements of the FLSA
- ADP: What Are Payroll Deductions? Pre-Tax and Post-Tax Deductions
- IRS: Tax Withholding Estimator
Frequently Asked Questions
Is take-home pay the same as net pay?
Yes. Net pay and take-home pay mean the same thing: the amount that actually lands in your bank account after every tax and deduction comes out of your gross pay.
How do I calculate net pay from gross pay?
Start with gross pay, subtract pre-tax deductions, then subtract federal income tax, FICA, and state and local tax, then subtract any post-tax deductions. What is left is your net pay.
Why is the gap between my gross and net pay so big?
FICA alone takes 7.65% of your wages, and federal and state income tax often add 10% to 25% more. Once benefit deductions are included, most workers take home roughly 70% to 80% of their gross pay.
Is gross pay before or after taxes?
Gross pay is before taxes. It is the full amount you earn from hours times rate plus any overtime, before a single dollar of tax or deduction is withheld.
Do 401(k) contributions reduce my taxable pay?
A traditional 401(k) contribution lowers the wages your federal income tax is figured on, so it cuts your income tax. It does not reduce FICA, because Social Security and Medicare are still calculated on the contribution.
Should I budget using gross pay or net pay?
Budget with net pay. Net pay is the money you can actually spend, while gross pay overstates what you have by the full amount of taxes and deductions.
What percentage of gross pay is net pay?
For most hourly W-2 workers, net pay is about 70% to 80% of gross pay. The exact share depends on your state, filing status, and how much you put toward benefits like health insurance and retirement.