Paycheck 101: Gross vs Net Pay, Taxes, and Deductions Explained (2025 Guide)

Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change periodically, always check current IRS/state guidance or consult a professional.

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Quick Answer: What Is Net Pay?

Net pay is your take-home pay. It equals your gross pay minus pre-tax deductions, taxes (federal, state/local, and FICA), and any post-tax deductions.

Key Takeaways

Gross pay is what you earn before taxes and deductions; net pay is what you take home.
Withholding includes federal income tax, state/local taxes (where applicable), and FICA (Social Security and Medicare).
Pre-tax benefits (e.g., 401(k), HSA, FSA) reduce taxable wages; post-tax deductions come out after taxes.
Not all pre-tax deductions reduce FICA; for example, 401(k) is pre-tax for income tax only.
Your pay stub shows current period and year-to-date (YTD) amounts, review both regularly.

How to Calculate Your Net Pay

Determine Gross Pay. Calculate your total earnings before any deductions. For salary: divide annual salary by pay periods. For hourly: multiply hourly rate by hours worked.
Subtract Pre‑Tax Deductions. Deduct pre‑tax items like 401(k), HSA, and health insurance premiums from gross pay to get taxable income.
Calculate Tax Withholdings. Calculate federal, state, and FICA taxes based on your taxable income and W‑4 settings.
Subtract Post‑Tax Deductions. Deduct any post‑tax items like Roth 401(k) or garnishments.
Calculate Net Pay. The remaining amount after all deductions is your net (take‑home) pay.

Tip: You can model these steps with our Paycheck Calculator.

Gross Pay vs. Net Pay

Gross pay is your total earnings before any taxes or deductions:

Salary example: $60,000/year paid biweekly → $60,000 ÷ 26 ≈ $2,307.69 gross per check.
Hourly example: $25/hour × 40 hours = $1,000 gross for the week.

Other earnings that affect gross pay

Gross isn’t just regular hours or salary. Your employer may also include:

Overtime (typically 1.5× after 40 hours under federal law for non‑exempt hourly workers; some states have additional rules)
Shift differentials (evening/weekend premiums)
Bonuses and commissions (often treated as supplemental wages for withholding)
Tips (reported tips are taxable and subject to FICA)
Allowances (per‑diem taxable portions, if any; not related to Form W‑4 “allowances” which no longer apply)
Paid time off (vacation/holiday/sick pay)
Retroactive pay adjustments (back pay, corrections)

Net pay is your take-home amount after taxes and deductions. In many payroll systems you’ll also see a line called taxable wages for each tax, this is your gross minus pre‑tax items applicable to that specific tax.

Basic flow: Gross pay → pre-tax deductions → taxable wages → tax withholdings → post-tax deductions → Net pay

Federal, State, and Local Taxes

Federal income tax: Withheld based on your W-4 (filing status, dependents, extra withholding, multiple jobs, etc.).
State and local taxes: Apply depending on where you live/work and local rules. Some states have flat rates; others have brackets; a few have no wage income tax.
City/county taxes: Certain localities require additional withholding.

Tip: Your W-4 choices influence federal withholding; many states have their own equivalent forms or follow your W-4.

How federal withholding is calculated (IRS Pub. 15‑T)

Employers compute withholding using IRS methods in Publication 15‑T. Two common approaches are the wage‑bracket method and the percentage method. Payroll systems effectively annualize your pay based on your pay frequency, consider your W‑4 inputs, then determine the per‑check withholding. The end‑of‑year tax you owe is reconciled when you file your return.

Your W‑4 matters

No more “allowances”: Since 2020, Form W‑4 no longer uses allowances; use the steps below to adjust withholding.
Step 2 (Multiple jobs): Ensures combined income is considered for withholding. You can use the checkbox or the IRS estimator; if skipped when you have multiple jobs, under‑withholding can occur.
Step 3 (Dependents): Reduces withholding if you qualify for the Child Tax Credit or other dependents.
Step 4(a) Other income: Adds non‑wage income (interest/dividends) to raise withholding.
Step 4(b) Deductions: Lowers withholding if you expect itemized deductions exceeding the standard deduction.
Step 4(c) Extra withholding: Adds a flat dollar amount per paycheck.

State and local variations

No‑income‑tax states: Several states do not tax wage income; others use flat or progressive systems.
Reciprocity agreements: In some regions, you may pay tax to your resident state even if you work in a neighboring state. Check your HR forms.
Local taxes: Select cities, counties, and school districts assess payroll taxes. Your pay stub typically shows them separately when applicable.

Pre-Tax vs. Post-Tax Deductions

Pre-tax deductions

Come out before taxes, lowering taxable wages:

401(k)/403(b)/457 contributions
HSA and FSA contributions
Certain health/dental/vision premiums
Commuter benefits

Tax treatment nuances: Pre‑tax retirement contributions (e.g., 401(k)) reduce federal, and in many states, state-taxable wages, but not FICA wages (Social Security/Medicare). Health, dental, and vision premiums made through a Section 125 cafeteria plan generally reduce both income and FICA wages. HSA and FSA contributions made through payroll under a Section 125 plan generally reduce both income and FICA; HSA contributions made outside payroll do not reduce FICA (they are instead deducted on your tax return). State treatment varies, see IRS Publication 969 and Publication 15‑B and your state guidance for specifics.

Post-tax deductions

Come out after taxes:

Roth 401(k) contributions
Charitable payroll deductions
Union dues
Wage garnishments
Miscellaneous voluntary benefits

Common edge cases

Roth vs. pre‑tax 401(k): Roth is post‑tax and doesn’t reduce current taxable wages; pre‑tax does but not for FICA.
Dependent care FSA: Reduces taxable wages up to annual limits; rules differ from health FSA.
Commuter benefits: Pre‑tax up to monthly limits for transit/parking and generally excluded from FICA; amounts over the limit are post‑tax.
Employer HSA contributions: Excludable from income and FICA. Employee salary‑reduction HSA contributions made through a Section 125 plan are also pre‑tax for income and FICA; contributions made outside payroll do not reduce FICA.

Contribution limits and rules change periodically, check current IRS guidance and your plan documents.

Pay Frequency and Pay Period Types

Your pay schedule affects the size of each check and how withholding is calculated per period:

Weekly (52/yr) and biweekly (26/yr) paychecks are smaller but more frequent.
Semimonthly (24/yr) and monthly (12/yr) checks are larger but less frequent.
Federal withholding tables annualize your pay based on the schedule, then derive the per‑check amount.
With biweekly or weekly schedules, you may have “extra paycheck” months where budgeting can change temporarily.

If you change pay frequency mid‑year, expect withholding and per‑check amounts to adjust accordingly.

How to Read a Pay Stub

Current vs. YTD: Most stubs show this pay period and year-to-date totals for earnings, taxes, and deductions.
Earnings detail: Regular hours, overtime, bonuses/commissions, holiday pay.
Taxes: Federal, state, local, Social Security, Medicare listed separately.
Deductions: Pre-tax and post-tax listed with descriptions.
Leave balances: PTO/sick balances may appear (varies by employer).

Taxable wages vs. gross

Your stub may show different taxable wage amounts for federal, state, Social Security, and Medicare. That’s because certain pre‑tax deductions reduce income for some taxes but not others.

Employee vs. employer

Some stubs label employee amounts as EE and employer portions as ER. Only the EE portion is withheld from your pay; ER amounts are paid by your employer.

W‑2 vs. pay stub

End‑of‑year Form W‑2 totals can differ from simple sums of your regular gross due to pre‑tax adjustments, benefit caps, and taxable fringe benefits. Use YTD lines for the most accurate in‑year view.

Examples

These simplified examples show the order of operations. Use the calculator to get precise numbers for your situation.

Example 1: Salary with 401(k) and Health Premiums

Salary: $60,000/year, biweekly pay schedule
Pre-tax: 5% 401(k), $150/period health premium
Flow: $2,307.69 gross → 5% 401(k) ($115.38) and $150 health → taxable wages ≈ $2,042.31 → federal/state/FICA withholding → post‑tax deductions (if any) → net pay
Notes: 401(k) lowers federal/state taxable wages but not FICA. Health premiums via a cafeteria plan usually lower both income and FICA wages.

Example 2: Hourly with Overtime

Hourly: $25/hour, 40 regular + 8 overtime at time-and-a-half
Gross: (40 × $25) + (8 × $37.50) = $1,000 + $300 = $1,300 → pre‑tax deductions (if any) → withholding (federal/state/FICA) → net pay
Notes: If overtime is paid in the same check as a bonus, the bonus may be treated as supplemental wages for withholding calculations.

Example 3: Hitting the Social Security Wage Base

Scenario: Your year‑to‑date Social Security wages reach the annual wage base mid‑November.
Effect: Social Security (OASDI) stops for the remainder of the year; Medicare continues, and federal/state withholding still applies.
Result: Take‑home pay increases slightly for the last few checks, then resets in January when the new wage base applies.

Frequently Asked Questions

Why does my bonus feel "taxed more"?

Employers can withhold on supplemental pay (bonuses, commissions) using special IRS methods that may differ from your regular check. Your actual annual tax is reconciled when you file your return.

How can I increase my take-home pay?

Consider adjusting your W-4, increasing pre-tax benefits (if appropriate), or reviewing post-tax deductions. Model changes in the calculator before submitting updates to HR.

Do pre-tax benefits reduce FICA too?

Some do (e.g., certain health premiums), while others (e.g., 401(k)) typically reduce federal/state taxable wages but not FICA. Check your plan details and current IRS rules.

Why did my net pay change this year?

Updates to tax brackets, benefit elections, or hitting wage bases can change withholding. Compare your first check of the year and confirm elections.

What happens when I reach the Social Security wage base?

Your Social Security tax stops for the rest of the year, but Medicare continues. Expect a small increase in take‑home pay until the new year starts.

Why did withholding jump after my raise?

Crossing into higher annualized income can raise per‑check withholding, and at higher earnings you may also see Additional Medicare Tax. Review your W‑4 and model the impact in the calculator.

I have two jobs. How should I handle my W‑4?

Use Step 2 on the W‑4 to account for multiple jobs (checkbox or IRS estimator). If each job withholds as if it’s your only job, you can be under‑withheld overall.

Do I need to update my W‑4 when my benefits change?

If pre‑tax deductions change significantly (e.g., adding a 401(k) or increasing HSA/FSA), your taxable wages change. It’s a good time to re‑evaluate your W‑4 settings.

Troubleshooting and Tips

Verify that your pre‑tax deductions are correctly marked as pre‑tax in payroll so taxable wages match expectations.
Confirm whether local taxes apply for your work location or residence; check reciprocity rules in border regions.
Compare current pay period with YTD lines when investigating changes, YTD reveals wage base limits and cumulative effects.
Changing jobs mid‑year: the Social Security wage base and the Additional Medicare Tax apply to your total annual wages, but each employer withholds separately. Over‑withheld Social Security is reconciled on your tax return; Additional Medicare is withheld by each employer after $200k, with final liability based on filing status and total wages.
Use our calculator to model W‑4 updates before submitting changes to HR.

References

IRS Publication 15-T (Federal Income Tax Withholding Methods) — Percentage and wage-bracket methods; rules for withholding on supplemental wages (bonuses, commissions).
IRS Form W-4 and Instructions — Employee withholding certificate and guidance that drives federal income tax withholding.
SSA Contribution and Benefit Base — Annual Social Security wage base limit for OASDI.
IRS Additional Medicare Tax — 0.9% additional Medicare tax rules and employer withholding threshold.
IRS Publication 969 (HSAs and Other Tax‑Favored Health Plans) — HSA/FSA treatment and when payroll contributions are pre‑tax for income and FICA.
IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits) — Section 125 cafeteria plans; pre‑tax health/dental/vision premiums and FICA treatment.