Gross Pay vs Net Pay: What Is the Difference?
If you have ever looked at your pay stub and wondered why your take-home pay is so much lower than your salary, the answer is the difference between gross pay and net pay. Understanding both terms is the first step to taking control of your personal finances.
What is gross pay?
Gross pay is your total compensation before any deductions are taken out. It is the number listed in your employment offer or contract — the "headline" salary. Gross pay includes:
- Base salary or hourly wages
- Overtime pay
- Bonuses and commissions
- Tips (in some industries)
- Paid time off when taken
Gross pay is what your employer agreed to pay you. It is also the starting point for calculating all taxes and deductions.
What is net pay?
Net pay — also called take-home pay — is what remains after all mandatory and voluntary deductions have been subtracted from your gross pay. It is the amount deposited into your bank account on payday.
Net pay is what you actually have available to spend, save, and invest. For most American workers, net pay is 65%–80% of gross pay depending on income level and state.
What comes between gross and net?
Several categories of deductions reduce your gross pay to net pay:
Mandatory tax withholding
- Federal income tax — varies by income, filing status, and W-4 elections
- Social Security tax — 6.2% of gross wages up to $176,100 (2026)
- Medicare tax — 1.45% of all gross wages
- State income tax — 0% to 13.3% depending on state
- Local income tax — required in some cities (NYC, Philadelphia, Detroit, etc.)
Pre-tax voluntary deductions (reduce taxable income)
- 401(k) and 403(b) contributions
- Health, dental, and vision insurance premiums
- Health Savings Account (HSA) contributions
- Flexible Spending Account (FSA) contributions
- Dependent Care FSA
Post-tax voluntary deductions
- Roth 401(k) contributions
- Life insurance premiums above $50,000 employer-paid
- Wage garnishments (if applicable)
Real example: $70,000 salary gross to net
Here is how a $70,000 annual salary translates to net pay for a single filer in Illinois (4.95% flat tax) on a bi-weekly pay schedule:
| Item | Annual | Per paycheck (bi-weekly) |
|---|---|---|
| Gross pay | $70,000 | $2,692.31 |
| Federal income tax (single) | −$8,206 | −$315.62 |
| Social Security (6.2%) | −$4,340 | −$166.92 |
| Medicare (1.45%) | −$1,015 | −$39.04 |
| Illinois state tax (4.95%) | −$3,465 | −$133.27 |
| Net take-home pay | $52,974 | $2,037.46 |
This example shows 24.3% going to taxes — meaning this worker takes home about $0.757 of every gross dollar earned. Use the MyNetPay.org calculator to model your exact situation.
Why gross pay matters even though net pay is what you spend
Gross pay is used to calculate several important things beyond your paycheck:
- Social Security benefits — your future benefit amount is based on your lifetime gross earnings record, not net pay
- Mortgage qualification — lenders use gross income to calculate debt-to-income ratios
- 401(k) contribution limits — the $23,500 annual limit is based on gross compensation
- Child support and alimony — courts typically calculate these obligations based on gross income
Frequently asked questions
Is gross pay or net pay used to qualify for a mortgage?
Mortgage lenders use gross monthly income to calculate your debt-to-income ratio. Your gross income is the basis for how large a mortgage you qualify for, even though you will be making payments from your net pay.
Can my net pay ever be higher than expected?
Yes — when your year-to-date Social Security wages exceed $176,100, Social Security withholding stops for the rest of the year. Paychecks after crossing that threshold are larger because the 6.2% Social Security deduction disappears.
Why do some pay stubs show "YTD gross" and "YTD net"?
YTD stands for year-to-date. These figures show your cumulative gross and net pay from January 1 through your most recent paycheck. YTD gross is important for tracking your Social Security wage base and 401(k) contribution limits throughout the year.
Free paycheck calculator for all 50 states — updated for 2026
Open Calculator →