Gross Pay vs. Net Pay: Where Your Paycheck Goes

If you have ever been surprised that your paycheck is smaller than your hourly rate suggests, the difference is deductions. Here is what separates gross pay from the net pay that actually reaches your bank account.

What is gross pay?

Gross pay is your total earnings for a pay period before any deductions. For an hourly worker it is your hours worked multiplied by your rate, plus any overtime, bonuses, or shift differentials. Our time card and overtime calculators both report gross pay.

What is net pay?

Net pay — also called take-home pay — is what remains after all mandatory and voluntary deductions are subtracted from your gross pay. It is the amount printed on your check or deposited to your account.

The deductions in between

• Federal income tax — withheld based on your W-4 and income.
• Social Security tax — 6.2% of wages up to the annual wage base.
• Medicare tax — 1.45% of all wages (with an additional 0.9% on high earners).
• State and local income tax — varies by state; some states have none.
• Voluntary deductions — health insurance premiums, 401(k) contributions, and similar.

Example paycheck

Imagine a weekly gross pay of $800. A rough breakdown might look like this (your actual withholding will differ):

Why it matters

Budgeting from gross pay is a common mistake. Because 15–30% (or more) of gross pay often goes to taxes and benefits, planning around your net figure gives a far more realistic picture of your monthly cash flow.

The deductions on your stub, line by line

Payroll deductions fall into a few predictable categories. Knowing which is which makes an unfamiliar pay stub much easier to check.

FICA: Social Security and Medicare

These are flat-rate payroll taxes, not progressive ones. The employee share is 6.2% for Social Security plus 1.45% for Medicare — 7.65% combined — and your employer pays a matching amount that never appears on your stub.

• Social Security applies only up to an annual wage base that is adjusted each year. High earners stop paying it once they pass that ceiling, which is why some stubs show take-home rising late in the year.
• Medicare has no wage cap, and an additional 0.9% Medicare surtax applies to wages above a statutory threshold ($200,000 for a single filer).
• FICA is withheld on essentially all wages, including overtime and bonuses.

Federal income tax withholding

Unlike FICA, federal income tax is progressive: successive slices of income are taxed at rising rates. Your employer estimates the annual tax from your Form W-4 and withholds a proportional amount each period. This is only an estimate — the true figure is settled when you file, which is why people receive refunds or owe a balance.

Two consequences are worth understanding. First, your marginal rate (the rate on your next dollar) is higher than your effective rate (total tax ÷ total income), so a raise is never taxed in a way that leaves you with less money overall. Second, if your withholding consistently misses, the fix is to update your W-4 rather than to wait for the annual reconciliation.

State and local taxes

Most states levy an income tax, but several — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax ordinary wage income. Some cities and counties add a local income tax on top. Many states also withhold small amounts for programs such as state disability or paid family leave, which appear as separate line items.

Pre-tax vs. post-tax deductions

Where a deduction sits relative to taxes changes how much it actually costs you. Pre-tax deductions come out before income tax is calculated, so they reduce your taxable wages; post-tax deductions come out of already-taxed money.

The practical effect: a $200 pre-tax retirement contribution reduces take-home pay by less than $200, because part of it would otherwise have gone to income tax. Note that traditional 401(k) contributions reduce income tax but not FICA — Social Security and Medicare are still withheld on that money.

Why bonus and overtime checks look overtaxed

A bonus often arrives with a noticeably larger share withheld, which leads people to conclude that bonuses are taxed at a punitive rate. They are not. Bonuses are supplemental wages, and employers commonly withhold federal income tax on them at a flat percentage rather than running them through your normal W-4 calculation.

That flat withholding is an estimate, not a separate tax. When you file your return, bonus income is taxed like any other wage income at your actual rates, and any over-withholding comes back as part of your refund. Overtime works differently again: it is withheld normally, but because a big overtime week makes your annualized income look higher than usual, the withholding formula can temporarily take a larger slice. That, too, evens out at filing.

How to check your own stub in five minutes

1. Confirm the hours: do regular and overtime hours match your own record of the period?
2. Recompute gross: hours × rate, plus overtime at the correct premium, plus any bonus or shift differential.
3. Check FICA: Social Security should be about 6.2% and Medicare about 1.45% of gross wages. A large deviation is worth asking about.
4. Review deductions: are benefit premiums and retirement contributions the amounts you elected?
5. Compare year-to-date totals against the current period to catch a one-off error that a single stub can hide.

This guide is for general informational purposes only and is not legal, tax, or financial advice. Labor laws vary by state and change over time. Confirm your specific situation with your employer, HR department, or the U.S. Department of Labor.