Gross Pay vs Net Pay: How Take-Home Pay Is Calculated

Gross pay is the number in your offer letter. Net pay is the number in your bank account. Everyone knows they are different. Far fewer people can explain the arithmetic in between, which matters, because that arithmetic is where every decision about benefits, retirement contributions, and withholding actually plays out.

This guide works through the full calculation in order, with a complete example using real 2026 figures, and explains why two people earning identical salaries can take home very different amounts.

Three numbers, not two

Most explanations of this topic name two figures. There are actually three, and the missing one is the reason the whole thing confuses people.

• Gross pay is everything you earned in the period before anything comes out. Base wages, overtime, bonuses, commissions, tips, and paid time off all belong here.
• Taxable wages sit in the middle. This is gross pay minus your pre-tax deductions, and it is the figure the tax calculation is actually run against. Almost nobody talks about it, and it never appears in a job advert.
• Net pay is what remains after taxes and every other deduction. Also called take-home pay.

Here is the complication that makes taxable wages worth naming: you do not have one taxable wage figure, you have several. Federal income tax, Social Security, Medicare, and state income tax each run against a slightly different base, because different pre-tax deductions are exempt from different taxes. That is why the wage boxes on your W-2 never match each other, and it is the single most common source of “my pay stub does not add up.”

The order of operations

Payroll runs this sequence every period. The order is not arbitrary, and changing it would change your net pay.

1. Calculate gross pay. Hours times rate for hourly workers, annual salary divided by pay periods for salaried workers, plus any additional earnings.
2. Subtract pre-tax deductions. Retirement deferrals, Section 125 health premiums, HSA and FSA contributions, commuter benefits.
3. Calculate each tax against its own wage base. Federal income tax, Social Security, Medicare, state, and local.
4. Subtract post-tax deductions. Roth contributions, garnishments, union dues, after-tax insurance.
5. What remains is net pay.

Step 2 is where the leverage is. A dollar moved from step 4 into step 2 is a dollar that never gets taxed, which is the entire reason pre-tax benefits exist.

Which pre-tax deductions dodge which taxes

This is the detail that trips up even people who are otherwise comfortable with payroll.

Deduction	Reduces federal income tax wages	Reduces Social Security and Medicare wages
Traditional 401(k), 403(b), 457	Yes	No
Section 125 health, dental, vision premiums	Yes	Yes
HSA contributions through payroll	Yes	Yes
Health care and dependent care FSA	Yes	Yes
Qualified commuter benefits	Yes	Yes
Roth 401(k)	No	No

The practical consequence is that a dollar through a cafeteria plan or an HSA avoids 7.65 percent more tax than a dollar into a traditional 401(k). It does not make the 401(k) a bad choice, since employer matching and contribution limits usually dominate the decision, but it is a real difference that rarely gets mentioned. We compare the accounts directly in FSA versus HSA, and the traditional against Roth question in traditional versus Roth 401(k).

State treatment adds a further layer, since a handful of states tax retirement deferrals that the federal government does not.

A complete worked example

Take a single filer earning $72,000 a year, paid biweekly across 26 periods, contributing 5 percent to a traditional 401(k), and paying $150 per period for health coverage through a Section 125 plan. To keep the federal arithmetic visible, assume a state with no income tax on wages.

Step 1: gross pay

$72,000 divided by 26 equals $2,769.23 per period.

Step 2: pre-tax deductions

• 401(k) at 5 percent: $138.46 per period, $3,600 for the year
• Health premium: $150.00 per period, $3,900 for the year

Step 3: the three wage bases

• Social Security and Medicare wages: $72,000 minus the $3,900 health premium equals $68,100. The 401(k) does not reduce this.
• Federal taxable wages: $72,000 minus $3,900 minus $3,600 equals $64,500.

Step 4: the taxes

Social Security at 6.2 percent of $68,100 equals $4,222.20 a year, or $162.39 per period. This continues until year to date wages reach the 2026 wage base of $184,500, which this worker never approaches. Full figures on our Social Security and Medicare limits page.

Medicare at 1.45 percent of $68,100 equals $987.45 a year, or $37.98 per period. There is no cap on this one.

Federal income tax takes the $64,500 of federal taxable wages and subtracts the 2026 standard deduction of $16,100, leaving $48,400 of taxable income. Applying the 2026 brackets:

• 10 percent on the first $12,400 equals $1,240
• 12 percent on the remaining $36,000 equals $4,320
• Total federal income tax: $5,560 a year, or $213.85 per period

Step 5: net pay

Line	Per period	Annual
Gross pay	$2,769.23	$72,000.00
401(k) contribution	$138.46	$3,600.00
Health premium	$150.00	$3,900.00
Federal income tax	$213.85	$5,560.00
Social Security	$162.39	$4,222.20
Medicare	$37.98	$987.45
Net pay	$2,066.55	$53,730.35

Net pay is roughly 74.6 percent of gross. Total tax is $10,769.65, which is 15.0 percent of gross pay.

Three things this example demonstrates

Your marginal rate is not your tax rate. This worker sits in the 12 percent bracket, but pays $5,560 of federal income tax on $72,000 of gross pay, an effective federal rate of 7.7 percent. The bracket describes the tax on the next dollar, not the average across all of them. If that distinction is not solid, tax brackets are not buckets covers it properly.

Payroll tax nearly matches income tax at this salary. Social Security and Medicare together take $5,209.65, almost as much as the $5,560 of federal income tax, and further down the income scale FICA overtakes it entirely. That matters because nothing reduces FICA. Deductions, credits, and a well-tuned W-4 all work on the income tax line and leave the payroll tax line untouched.

The 401(k) does not cost what it looks like. Contributing $3,600 reduces take-home pay by roughly $3,000, not $3,600, because the contribution lowers federal taxable wages and saves about $592 in tax. The money is also still yours, sitting in an account. Take-home pay understates what you actually earned by the full amount of every retirement dollar. The annual ceiling is covered in the 2026 401(k) limit guide.

Why identical salaries produce different take-home pay

Two people can both earn $72,000 and see paychecks hundreds of dollars apart. The variables, roughly in order of impact:

• State and local income tax. The largest single swing. Compare rates on our state income tax rates page, or check the states with no income tax. Some cities and school districts add their own tax on top. We work through the full comparison in same salary, different state.
• Filing status. Single, married filing jointly, and head of household use different brackets and different standard deduction amounts.
• Benefit elections. A family health plan can cost several hundred dollars a period more than employee-only coverage.
• Retirement contribution rate. The difference between 3 percent and 15 percent is enormous, and none of it is a loss.
• W-4 entries. Dependents, extra withholding, and other income all move the federal figure. See how to fill out a W-4.
• State disability and paid leave premiums. California, New York, New Jersey, Washington and others withhold these; most states do not.
• Pay frequency. Biweekly means 26 checks, semimonthly means 24. Same annual money, different sized checks, and different benefit deduction timing.

Gross-up: working the calculation backwards

Occasionally an employer needs you to receive a specific net amount, typically for relocation, a signing bonus, or an expense that turns out to be taxable. Paying you that figure directly does not work, because tax comes out of it. The fix is a gross-up.

The formula is: gross amount equals net amount divided by (1 minus the combined tax rate).

To deliver $5,000 net where the combined federal supplemental, Social Security, and Medicare rate is roughly 29.65 percent, the employer must pay $5,000 divided by 0.7035, which is about $7,107. Note that this is not simply $5,000 plus 29.65 percent, which would give $6,483 and fall short. Grossing up is the reason relocation packages cost employers far more than the headline figure, and it is worth understanding before negotiating one.

When gross pay is the right number to use

Net pay governs your life, but plenty of institutions want the gross figure, and using the wrong one costs you.

• Mortgage and loan applications calculate debt to income ratios against gross monthly income. Quoting net will make you look less creditworthy than you are.
• Rental applications commonly apply an income threshold of two and a half or three times the monthly rent, and almost always mean gross.
• Salary negotiation and job comparison happens in gross, though the net comparison is the one that should decide it, particularly across state lines.
• Retirement contribution rates are percentages of gross, not net.
• Your household budget is the one place that must use net. Building a budget on gross is the most common reason budgets fail on contact with reality.

If you are self-employed, none of this happens automatically

Freelancers, contractors, and gig workers receive gross. There is no step 2 through 5, no withholding, and no employer covering half of Social Security and Medicare. The money arrives whole, which feels excellent and is misleading.

Self-employed workers owe income tax plus self-employment tax of 15.3 percent covering both halves of FICA, generally paid through quarterly estimated payments. A reasonable working assumption is to set aside 25 to 30 percent of every payment, adjusted for your bracket and state. See self-employment tax and estimated taxes 2026.

Checking your own numbers

Run the sequence above against your own stub. The Social Security and Medicare steps are flat percentages, so they should reconcile almost to the cent, and if they do not, something is wrong. Federal income tax is harder to verify by hand because it depends on your W-4 entries and the withholding method your employer uses.

For a figure to check against, put your salary and deductions into our United States salary calculator. To identify each line on the stub itself, how to read your pay stub walks through every abbreviation. And if one paycheck looks unusually small, note that a bonus or commission in the same period is withheld differently, which is explained in why your bonus paycheck looks overtaxed.

Frequently asked questions

Figures reflect 2026 federal rates and thresholds. This is general information rather than tax advice.