Gross pay is what you earn; net pay is what you keep. The difference between gross pay and net pay is everything your employer withholds before your paycheck lands in your account: federal income tax, Social Security and Medicare, state and local taxes, your share of health insurance premiums, retirement contributions, and anything else deducted along the way. For a worker earning $60,000 a year, gross pay is $60,000, but net pay after those deductions can easily drop to $45,000 or less. The gap is wider than most people expect, and understanding where each dollar goes is the only way to budget around the number that actually matters.
What Gross Pay Includes
Gross pay is your total compensation for a pay period before any deductions. Salaried workers get the figure by dividing annual salary by the number of pay periods in a year; hourly workers multiply their rate by hours worked. Either way, gross pay reflects the full value of your labor before anyone takes a cut.
Several extras fold into the gross number. Under the Fair Labor Standards Act, most non-exempt employees earn at least one and a half times their regular rate for every hour beyond 40 in a workweek.1U.S. Department of Labor. Fact Sheet 23 – Overtime Pay Requirements of the FLSA Commissions, performance bonuses, tips, and shift differentials all count toward gross pay as well. If it shows up on your pay stub as earnings, it’s part of the gross figure that deductions get calculated from.
What Gets Taken Out Before You See It
The deductions that create the gross-to-net gap fall into three groups: mandatory taxes you can’t opt out of, voluntary benefits you choose to pay into, and the occasional court-ordered garnishment.
Federal Income Tax
Your employer withholds federal income tax from each paycheck based on the W-4 form you filled out, including your filing status and any adjustments for dependents or other income.2Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source The withholding is an estimate of what you’ll owe when you file your annual return. Too much withheld means a refund; too little means you owe the difference, possibly with penalties. Keeping your W-4 current is the simplest way to keep net pay predictable.
Social Security and Medicare
The Federal Insurance Contributions Act requires two separate payroll taxes. You pay 6.2 percent of your gross wages toward Social Security and 1.45 percent toward Medicare,3Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax and your employer matches both amounts dollar for dollar.4Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax The employer’s share doesn’t come out of your check, but it’s part of what it costs to employ you.
Your combined FICA share is 7.65 percent of gross wages. On a $60,000 salary, that’s $4,590 a year, or about $177 from each biweekly paycheck. Social Security tax only applies to the first $184,500 of earnings in 2026;5Social Security Administration. Contribution and Benefit Base once your year-to-date wages cross that line, the 6.2 percent withholding stops and net pay rises for the rest of the year. Medicare has no wage cap, and an additional 0.9 percent kicks in on wages above $200,000 for single filers or $250,000 for married couples filing jointly.3Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
State and Local Taxes
Most states impose income tax on wages, with top marginal rates ranging from under 3 percent to over 13 percent depending on where you live. Nine states charge no state income tax on wages at all, which can make a meaningful difference in net pay. Some cities and counties add their own income or payroll taxes on top. About 18 states and territories also require payroll deductions for programs like state disability insurance or paid family and medical leave, usually a fraction of a percent up to just over one percent of wages.
Pre-Tax Benefits
Pre-tax deductions come out of gross pay before federal income tax and, in most cases, FICA are calculated. Every dollar you route into a pre-tax benefit lowers the income the government taxes, which is why these deductions reduce your net pay by less than their face value.
- 401(k) or 403(b) contributions. You can defer up to $24,500 of your salary in 2026. Workers aged 50 and older can add an additional $8,000 in catch-up contributions, and those aged 60 through 63 get a higher catch-up limit of $11,250 under the SECURE 2.0 Act.6Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
- Health Savings Accounts. With a high-deductible health plan, you can contribute up to $4,400 for self-only coverage or $8,750 for family coverage in 2026. HSA contributions made through payroll dodge federal income tax, Social Security tax, and Medicare tax.7Internal Revenue Service. Notice 2026-05 – HSA Contribution Limits
- Flexible Spending Accounts. Health FSAs let you set aside up to $3,400 in 2026 for qualified medical expenses, but unused funds generally expire at the end of the plan year.8Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
- Health insurance premiums. Most employer-sponsored plans deduct your share of the premium on a pre-tax basis.
One important detail: traditional 401(k) contributions reduce federal and state income tax but do not reduce FICA. HSA contributions through payroll are the exception that reduces both.
Post-Tax Deductions
Post-tax deductions come out after taxes are calculated, so they lower your net pay without lowering your taxable income this year. Roth 401(k) contributions are the common example: you pay tax on the money now, but qualified withdrawals in retirement are tax-free. Supplemental life insurance, disability coverage, and union dues often sit in this category too.
Wage Garnishments
Garnishments are involuntary deductions ordered by a court or government agency, and they come out after taxes are calculated. For ordinary consumer debts like credit cards or medical bills, federal law caps garnishment at the lesser of 25 percent of your disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage, currently $7.25 per hour.9Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment Child support, alimony, and federal tax levies follow stricter rules that can take a larger share.10Internal Revenue Service. Information About Wage Levies
A $60,000 Salary, Worked Through
The arithmetic is more useful than the abstraction. Here’s what a single filer earning $60,000 on a biweekly schedule might see on one paycheck, assuming a 6 percent 401(k) contribution and a modest health premium:
- Gross pay per period: $60,000 ÷ 26 = $2,308
- Pre-tax 401(k) contribution (6%): −$138
- Pre-tax health insurance premium: −$120
- Taxable wages for the period: $2,050
- Federal income tax (estimated withholding): −$205
- Social Security (6.2% of $2,308 gross): −$143
- Medicare (1.45% of $2,308 gross): −$33
- State income tax (estimated): −$80
- Net pay: approximately $1,589
Social Security and Medicare are calculated on gross wages, not on the amount left after your 401(k) deduction. Federal withholding depends on your W-4 elections, and state taxes vary enormously, so your real paycheck will differ. The pattern holds, though: $60,000 in gross pay becomes roughly $41,300 in annual net pay in this scenario, a gap of about 31 percent.
If You’re Self-Employed
If you work as an independent contractor or freelancer, no employer is splitting FICA with you or withholding taxes from your payments. You receive gross pay with nothing taken out, which feels great in the moment and creates problems later if you aren’t setting money aside.
Self-employed workers pay the full 15.3 percent in self-employment tax: 12.4 percent for Social Security and 2.9 percent for Medicare.11Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That’s both halves combined. You can deduct the employer-equivalent half when calculating your adjusted gross income, which softens the blow, but the total FICA burden is still nearly double what a W-2 employee pays out of pocket. You’re also responsible for quarterly estimated tax payments. For 2026, the deadlines are April 15, June 15, September 15, and January 15 of the following year.12Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals Missing them triggers underpayment penalties that accumulate daily. A common trap: spending what feels like a fat gross payment without reserving 25 to 30 percent for taxes.
Budget With the Net Number
Gross pay is the number employers use in job offers, salary negotiations, and benefits calculations. Net pay is the number your landlord and grocery store care about. Building a budget around gross pay is one of the most common financial planning mistakes, and it’s easy to make when switching from hourly work to salary or from W-2 employment to freelancing.
The same logic applies when comparing job offers. A position paying $70,000 with no employer-sponsored health insurance can leave you with less net pay than one paying $65,000 with heavily subsidized premiums and a 401(k) match. Comparing offers on gross salary alone is like comparing apartments on square footage without asking about rent. Once you know your real net pay, you know what you actually have to work with.