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Gross Pay vs. Net Pay: A Simple Guide

When you look at your paycheck, you’ll usually see two important numbers: gross pay and net pay. Your gross pay is what you earn before anything is taken out. Your net pay is the amount that actually lands in your bank account. Understanding the difference helps you budget, plan for taxes, and make informed choices about your benefits.

What Is Gross Pay?

Gross pay is your total earnings before any taxes or deductions come out.

Gross pay includes:

• Your hourly wages or salary
• Overtime pay
• Bonuses
• Commissions
• Tips (if reported to your employer)
• Shift differentials or premium pay

How to calculate gross pay

• Hourly employees:
  Hourly rate × hours worked
  • any overtime (usually paid at 1.5× or 2× the hourly rate)
  • bonuses, tips, or other earnings
• Salary employees:
  Annual salary ÷ number of pay periods per year
  • bonuses or other additional earnings
Gross pay is always the “starting point” of a paycheck.

What Is Net Pay?

Net pay is the money you actually take home after taxes and other deductions are subtracted from your gross pay. It’s often called take-home pay.

Net pay subtracts things like:

Mandatory deductions

• Federal income tax
• State income tax (if your state has one)
• Social Security tax (6.2% of wages up to the annual limit)
• Medicare tax (1.45% of all wages, plus an extra 0.9% for high earners)
• State SDI income tax (if your state has one – in California, the rate changes annually and is 1.2% of wages in 2025)

Voluntary deductions

(only taken if you choose to enroll)

• Health insurance premiums
• Dental & vision insurance
• Retirement contributions (401(k), 403(b), etc.)
• Flexible spending accounts (FSA)
• Health savings accounts (HSA)
• Life or disability insurance
• Union dues
• Charitable contributions deducted through payroll

How to calculate net pay

Gross pay
      Mandatory taxes
      Voluntary benefit deductions
      = Net pay (take-home pay)

Key Differences Between Gross Pay and Net Pay

Think of gross pay as “what you earned,” and net pay as “what you keep.”

Items That Must Be Considered When Calculating Net Pay

To accurately calculate net pay, employers look at:

1. Your tax withholding elections. You can affect your net pay by adjusting the entries you make on your Federal (Form W-4) and State (Form DE4 in California) withholding forms. These forms are used by your employer(s) to calculate the amounts of withholding subtracted from your gross pay for income tax purposes. Keep in mind that how you complete these forms will have an impact on how much you owe or get back in the form of a refund when you file your income tax returns. Information submitted on these forms includes things like:

• Filing status (single, married, etc.)
• Number of dependents
• Extra tax you choose to withhold

2. Benefit choices. Your benefit choices directly affect your net pay, so it is important to select benefits that best match your needs for coverage and your specific situation. For example, if you are young and healthy, you may want to consider plans with higher deductibles in order to save on monthly premiums.

• Medical, dental, vision coverage
• Whether benefits are pre-tax or post-tax

3. Retirement contributions

• Traditional 401(k)/403(b) = pre-tax. “Pre-tax” means that these deductions reduce the amount of wages used for calculating your income tax withholding. So, while increasing your traditional 401K contributions will reduce your overall net pay, it will also reduce the amount of income tax withholding that will be deducted from your paycheck.
• Roth 401(k) = after-tax

4. Required payroll taxes

• Social Security
• Medicare

5. Other deductions

• Wage garnishments
• Court-ordered payments
• Union dues

All of these affect how much of your gross pay turns into net pay.

How to Increase Net Pay Without Increasing Gross Pay

Even if your earnings (gross pay) stay the same, there are smart ways to take home more money:

1. Adjust your tax withholding

If you’re consistently getting a large tax refund, you may be having too much withheld from your paycheck.
→ Updating your W-4 can increase your net pay each pay period.

2. Choose pre-tax benefits when possible

Pre-tax deductions reduce taxable income, which means you pay less in taxes. Examples:

• Health insurance premiums
• Traditional 401(k) contributions
• FSA or HSA contributions

Less taxable income = higher net pay.

3. Use an HSA if you’re eligible

Health Savings Accounts offer:

• Pre-tax contributions
• Tax-free growth
• Tax-free withdrawals for medical expenses

This reduces your taxable income and increases take-home pay.

4. Review your benefit selections

Some benefits may be optional and reduce your paycheck more than they’re worth to you.

Examples:

• Extra life insurance coverage
• Supplemental disability plans
• Add-on benefits you don’t use

Choosing leaner coverage can increase net pay.

5. Reduce after-tax deductions

These deductions come out after taxes, meaning they directly lower net pay. Examples:

• Roth retirement contributions
• Charitable payroll deductions
• Union dues (if optional)

Switching some contributions from after-tax to pre-tax will increase net pay.

6. Check for unnecessary garnishments or incorrect deductions

Rare, but errors happen. Always review your pay stub.

Summary

• Gross pay is your total earnings before taxes and deductions.
• Net pay is the money you actually take home.
• The difference comes from taxes, benefits, and other deductions.
• You can raise your net pay by adjusting tax withholding, choosing pre-tax benefits, reviewing optional deductions, and optimizing your benefit choices.

Understanding how this works helps you take control of your paycheck and avoid surprises on payday.