How to Calculate Gross Pay vs Net Pay
The Formula
Gross Pay − Deductions = Net Pay
Gross pay is your total earnings. Net pay is what you take home after taxes, insurance, retirement, and other deductions. The gap can be 25-40% or more of your gross pay.
Ever wonder why your paycheck is so much less than you expected? This guide breaks down exactly how your gross pay becomes your net pay, with a real calculation example.
Gross Pay vs Net Pay: Definitions
Gross Pay
Your total earnings before anything is taken out.
Hourly: Hours × Rate
Salary: Annual ÷ Pay Periods
Net Pay
What you actually receive (take-home pay).
Gross − Pre-tax − Taxes − Post-tax
= Net Pay
Types of Deductions
Pre-Tax Deductions
Mandatory Deductions
Post-Tax Deductions
Step-by-Step Calculation
Start with Gross Pay
Hours worked × hourly rate (or salary ÷ pay periods)
80 hours × $25/hr = $2,000
Subtract Pre-Tax Deductions
401(k), health insurance, HSA
$2,000 - $150 (401k) - $100 (insurance) = $1,750 taxable
Calculate Federal Tax
Based on W-4 and tax brackets
$1,750 × estimated rate = ~$175
Calculate State Tax
Varies by state (0% to 13%+)
$1,750 × 5% = $87.50
Calculate FICA
Social Security (6.2%) + Medicare (1.45%)
$2,000 × 7.65% = $153
Subtract Post-Tax Deductions
Roth 401k, garnishments, etc.
-$50 Roth 401k
Result: Net Pay
What you actually receive
$2,000 - $565.50 = $1,434.50
Real Example: Bi-Weekly Paycheck
Gross Pay
$4,000.00
PRE-TAX DEDUCTIONS
TAXES
POST-TAX DEDUCTIONS
This employee keeps 65.1% of their gross pay (34.9% goes to deductions)
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Frequently Asked Questions
What is gross pay?
Gross pay is your total earnings before any deductions. For hourly workers, it's hours worked times hourly rate. For salaried employees, it's your annual salary divided by the number of pay periods. Gross pay is what you'd earn if nothing was taken out.
What is net pay?
Net pay (also called 'take-home pay') is what you actually receive after all deductions—taxes, insurance, retirement contributions, etc. It's the amount deposited to your bank account or shown on your paycheck.
Why is my net pay so much lower than my gross pay?
The difference is due to: (1) Federal and state income taxes, (2) Social Security (6.2%) and Medicare (1.45%) taxes, (3) Health insurance premiums, (4) Retirement contributions, and (5) Other deductions. Combined, these can reduce your pay by 25-40% or more.
How do I calculate my net pay from gross?
Gross pay minus all deductions equals net pay. Start with gross, subtract pre-tax deductions (401k, insurance), calculate taxes on the remaining amount, subtract mandatory taxes (federal, state, FICA), then subtract post-tax deductions (Roth 401k, garnishments).
Do pre-tax deductions reduce my taxes?
Yes. Pre-tax deductions (traditional 401k, health insurance, HSA) reduce your taxable income. If you contribute $500 pre-tax, you're taxed on $500 less income. This saves you money in the short term, though you'll pay taxes when you withdraw retirement funds.
What's the difference between pre-tax and post-tax deductions?
Pre-tax deductions are taken out before taxes are calculated, reducing your taxable income (traditional 401k, health insurance). Post-tax deductions are taken after taxes (Roth 401k, some insurance). With post-tax, you pay taxes now but not later (like Roth retirement accounts).
What percentage of my paycheck goes to taxes?
It varies based on income and location. Federal income tax: 10-37% (marginal rate). State tax: 0-13%+ depending on state. FICA (Social Security + Medicare): 7.65% flat. Total often ranges from 20-40%+ of gross pay.
How can I increase my net pay?
Options include: (1) Contribute more to pre-tax accounts to lower taxes now, (2) Adjust W-4 if you're over-withholding (getting large refunds), (3) Review insurance options during open enrollment, (4) Check if you qualify for tax credits. Don't stop retirement contributions just to increase take-home pay.
Understand Your Paycheck
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