Summary
Gross pay is the total an employee earns in a pay period before anything is taken out: hours multiplied by the rate for hourly staff, or the salary divided by the number of pay periods, plus overtime, bonuses, commissions and shift differentials. Net pay is what is left after deductions and lands in the employee's bank account. Between the two sit pre-tax deductions such as 401(k) contributions and health premiums, mandatory taxes (federal and state income tax withholding, Social Security at 6.2% and Medicare at 1.45%), and post-tax deductions such as Roth contributions and wage garnishments. For a typical employee, net pay is roughly 70% to 80% of gross. Getting gross pay right starts with accurate hours, because every deduction is calculated from it.
Every line on a payslip is calculated from gross pay, and gross pay for hourly staff is calculated from hours. E-Monitor's time tracking records actual hours and overtime per workweek and exports them to payroll, so gross pay starts from a verified number. Start free →
Gross Pay vs Net Pay at a Glance
| Gross pay | Net pay | |
|---|---|---|
| Definition | Total earnings before any deductions | Earnings after all deductions; take-home pay |
| Includes | Regular wages or salary, overtime, bonuses, commissions, differentials, paid leave | Whatever remains after taxes, benefits and withholdings |
| Used for | Offer letters, salary bands, loan and rental applications, tax calculations | Personal budgeting; the amount deposited |
| Where it appears | Top of the pay stub; Box 1, 3 and 5 of the W-2 (after pre-tax adjustments) | Bottom of the pay stub |
| Who controls the gap | - | Tax law, the employee's W-4 and benefit elections, court orders |
In short: gross is what the job pays, net is what the employee receives. When a job is advertised at $60,000 a year, that is gross. When an employee asks why their paycheck is smaller than their salary divided by 26, the answer is the deductions between gross and net.
How to Calculate Gross Pay
Hourly employees. Multiply regular hours by the hourly rate, then add overtime hours at the overtime rate. An employee paid $22 an hour who works 44 hours in a workweek earns (40 × $22) + (4 × $33) = $880 + $132 = $1,012 gross for that week. Overtime is owed at time and a half for hours over 40 in a workweek under federal law, and the regular rate must include nondiscretionary bonuses and shift differentials.
Salaried employees. Divide the annual salary by the number of pay periods. A $65,000 salary is $2,500 gross per biweekly paycheck (26 periods), $2,708.33 per semi-monthly paycheck (24 periods) and $5,416.67 per month. Our guide to biweekly vs semi-monthly pay explains why the same salary produces different paycheck amounts.
Add-ons. Bonuses, commissions, tips reported to the employer, holiday pay and paid time off are all part of gross pay in the period they are paid. Expense reimbursements under an accountable plan, including per diem at or below the federal rate, are not.
For hourly staff, gross pay is only as accurate as the hours behind it. Rounding, missed punches and timesheets filled in from memory flow straight into gross pay and then into every tax calculated from it. Our time card calculator converts clock times to decimal hours and gross pay for a quick check.
Deductions Between Gross and Net
Deductions fall into three groups, and the order matters because pre-tax deductions reduce the amount that taxes are calculated on.
1. Pre-tax deductions come out first. Traditional 401(k) and 403(b) contributions reduce income subject to federal income tax but not Social Security and Medicare. Health, dental and vision premiums, health savings account contributions and flexible spending accounts paid through a Section 125 cafeteria plan reduce both income tax and FICA. Commuter benefits are also pre-tax within monthly limits.
2. Taxes are calculated on what remains:
| Tax | Employee rate | Notes |
|---|---|---|
| Social Security (OASDI) | 6.2% | On wages up to $184,500 in 2026 and $192,300 in 2027; the employer pays a matching 6.2% |
| Medicare | 1.45% | No wage cap; employer matches. An extra 0.9% applies to wages over $200,000 (employee only) |
| Federal income tax | Varies | Withheld using the employee's Form W-4 and IRS Publication 15-T tables; supplemental pay such as bonuses can be withheld at a flat 22% |
| State and local income tax | Varies | None in nine states, including Texas, Florida and Washington; some cities, such as New York City and Philadelphia, add their own |
| State disability or paid leave | Varies | Employee-paid in states such as California, New York, New Jersey and Washington |
3. Post-tax deductions come out last: Roth 401(k) contributions, after-tax life or disability insurance, union dues, charitable payroll giving, and court-ordered wage garnishments for child support, unpaid taxes or creditor judgments. Garnishments are capped by federal law as a percentage of disposable earnings.
Worked Example: From Gross to Net
An employee on a $65,000 salary, paid biweekly, contributes 5% to a traditional 401(k) and pays $100 per paycheck for health insurance through a cafeteria plan. Income tax figures are illustrative; actual withholding depends on the W-4 and state.
| Line | Amount | Calculation |
|---|---|---|
| Gross pay | $2,500.00 | $65,000 / 26 |
| 401(k), pre-tax | -$125.00 | 5% of gross; reduces income tax only |
| Health premium, pre-tax | -$100.00 | Section 125; reduces income tax and FICA |
| Social Security | -$148.80 | 6.2% × $2,400 (gross less health premium) |
| Medicare | -$34.80 | 1.45% × $2,400 |
| Federal income tax | -$180.00 | Illustrative, on $2,275 taxable |
| State income tax | -$70.00 | Illustrative |
| Net pay | $1,841.40 | About 74% of gross |
The same employee's W-2 will show different wage figures in different boxes: Box 1 (federal taxable wages) excludes both the 401(k) and the health premium, while Boxes 3 and 5 (Social Security and Medicare wages) exclude only the health premium. That is why the W-2 rarely matches the salary on the offer letter.
Reading a Pay Stub
A pay stub, or earnings statement, shows the path from gross to net for the current period and the year to date. Most states require employers to provide one, and many specify what it must contain. A typical stub has four blocks:
- Earnings: each type of pay on its own line, such as regular, overtime, holiday, PTO, bonus and shift differential, with hours, rate and amount. Hourly employees should be able to check hours against their own record here.
- Pre-tax deductions: retirement contributions, health premiums, HSA and FSA contributions.
- Taxes: federal income tax, Social Security, Medicare, and state and local taxes, each shown separately.
- Post-tax deductions: Roth contributions, garnishments, union dues, after-tax insurance.
The bottom line is net pay, often followed by how it was paid: the amount deposited to each bank account. The year-to-date column is the one to check periodically, because it shows whether Social Security has stopped at the wage base, whether retirement contributions are on track, and whether total withholding looks right for the year.
For hourly employees, the earnings block is where most disputes start. A paycheck that looks short is usually explained by hours: a missed punch, a deducted break that was worked, overtime that was not approved in time, or a pay period that split a workweek. Our guide to pay periods explains why a week's overtime can appear on the next paycheck.
Common Gross-to-Net Errors
- Wrong hours. Unrecorded overtime, deducted breaks that were worked, and rounding that always favours the employer understate gross pay and are the commonest source of wage claims. See timesheet rounding rules.
- Bonus left out of the overtime rate. A production or attendance bonus must be added to the regular rate, so overtime in the same period must be recalculated.
- Stale W-4 or state setup. Remote employees who move states without telling payroll end up withheld for the wrong state.
- Social Security after the wage base. Employees who change jobs mid-year can overpay; they recover the excess on their tax return, but the employer cannot stop withholding early.
- Deducting below minimum wage. Deductions for uniforms, tools or shortages that take a non-exempt employee below the minimum wage for the workweek are unlawful.
Each of these starts as a data problem before it becomes a payroll problem. Our guide to how payroll works covers the full cycle from time collection to tax filing.
Related reading: Free Timesheet Template, How to Calculate the Fully Loaded Cost of an Employee, Pay Transparency and Productivity Data.
Frequently Asked Questions
1. What is the difference between gross pay and net pay?
Gross pay is total earnings before deductions. Net pay is what remains after pre-tax deductions, taxes and post-tax deductions are taken out, and is the amount the employee actually receives.
2. How do I calculate gross pay?
For hourly employees, multiply regular hours by the hourly rate and add overtime hours at 1.5 times the regular rate. For salaried employees, divide the annual salary by the number of pay periods. Add bonuses, commissions and paid leave in the period paid.
3. How do I calculate net pay?
Start with gross pay, subtract pre-tax deductions, calculate and subtract Social Security, Medicare and income tax withholding, then subtract post-tax deductions such as Roth contributions and garnishments.
4. What percentage of gross pay is net pay?
Typically 70% to 80%, depending on income level, state and local taxes, retirement contributions and benefit elections.
5. Is salary gross or net?
Salary figures in offer letters and job adverts are gross annual amounts before taxes and deductions.
6. What are the Social Security and Medicare rates?
Employees pay 6.2% Social Security on wages up to $184,500 in 2026 and $192,300 in 2027, and 1.45% Medicare on all wages, plus an extra 0.9% on wages over $200,000. Employers match the 6.2% and 1.45%.
7. Do pre-tax deductions reduce Social Security tax?
Section 125 cafeteria plan deductions such as health premiums do. Traditional 401(k) contributions do not; they reduce income tax only.
8. Is gross pay on the W-2?
Not exactly. W-2 wage boxes show gross pay adjusted for pre-tax deductions, so Box 1 is usually lower than gross salary, and Boxes 3 and 5 can differ from Box 1.
Gross pay that starts from verified hours. E-Monitor's automatic time tracking records actual start, stop and break times, applies overtime per workweek and exports hours to payroll, so the number at the top of every pay stub is right before any deduction is applied. 7-day free trial, no credit card. Sign up →