Gross is the figure before taxes; net is what’s left after taxes and other deductions come out. When someone asks whether net or gross is before taxes, the short answer is gross. If your offer letter says $60,000, that’s your gross pay. The smaller number that lands in your bank account each payday is your net pay, and the gap between the two is filled by income tax, payroll taxes, and any other withholdings you’ve agreed to or been ordered to pay.
What Counts as Gross Pay
Under federal tax law, gross income means all income from whatever source, including wages, salaries, and tips.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined For an employee, it’s the salary or hourly rate quoted before anything is taken out. Amounts withheld for income tax, Social Security, and Medicare still count as part of your gross income in the year they’re withheld.2Internal Revenue Service. Topic No. 401, Wages and Salaries
Gross pay isn’t only base wages. It also includes overtime, which federal law sets at a minimum of 1.5 times your regular hourly rate for hours beyond 40 in a workweek,3Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours plus commissions, bonuses, tips, and holiday pay. Your employer totals all of it on Form W-2 at year-end. If you’re an independent contractor rather than an employee, that same income flows through Form 1099-NEC instead.4Internal Revenue Service. Forms and Associated Taxes for Independent Contractors
What Gets Subtracted Before You See Your Net
Several things stand between your gross pay and your net pay. Some are legally required, some are voluntary, and some depend on your circumstances.
Federal Income Tax
Federal income tax is progressive: higher rates apply only to income above each threshold, not to your whole paycheck. Before the rates are applied, you subtract the standard deduction (or itemized deductions) from your income. For tax year 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Your employer estimates your annual tax and withholds a portion from each paycheck based on the filing status, dependents, and adjustments you list on Form W-4.6Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate If your circumstances change during the year, updating the W-4 changes how much comes out.
Social Security and Medicare
On top of income tax, your employer withholds payroll taxes under the Federal Insurance Contributions Act. The employee portion is 6.2% for Social Security on wages up to $184,500 in 2026, with earnings above that cap not subject to Social Security tax,7Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates8Social Security Administration. Contribution and Benefit Base plus 1.45% for Medicare on all wages with no cap. An additional Medicare tax of 0.9% applies to wages over $200,000 in a calendar year, and your employer does not match that additional portion.9Internal Revenue Service. Publication 926, Household Employer’s Tax Guide
Your employer matches the base 6.2% and 1.45% contributions, but the match doesn’t come out of your paycheck. For most workers earning under the Social Security cap, combined FICA withholding is 7.65% of gross wages.
State and Local Taxes
Most states impose their own income tax, with rates ranging from around 1% to over 13% depending on the state and your income. A handful of states have no individual income tax at all. Some states also withhold for disability insurance or paid family leave. Where you live can meaningfully change your net pay even when your gross pay is identical.
Retirement Contributions
If your employer offers a 401(k) or 403(b), you can contribute up to $24,500 in 2026. Workers aged 50 and older can add a catch-up contribution of $8,000, and those aged 60 through 63 qualify for a higher catch-up of $11,250.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 Traditional contributions come out before federal income tax is calculated, lowering your taxable income now; you pay tax when you withdraw in retirement. Roth contributions come out of after-tax dollars, so your take-home pay shrinks more today, but qualified withdrawals later are tax-free.
Insurance, FSAs, and Garnishments
Health, dental, and vision premiums are often deducted pre-tax through your employer’s plan, lowering both taxable income and net pay. Flexible spending accounts for medical or dependent care work the same way. Court-ordered deductions, including child support, alimony, and unpaid consumer debt, also reduce net pay. Federal law caps garnishment for consumer debt at the lesser of 25% of your disposable earnings or the amount by which your weekly earnings exceed 30 times the federal minimum wage.11Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment Child support and tax levies follow different limits and can take a larger share.
A Sample Paycheck From Gross to Net
Take a single filer earning $60,000 a year who contributes 6% of salary to a traditional 401(k) and lives in a state with no income tax:
- Gross annual pay: $60,000
- 401(k) contribution (6%): −$3,600
- Social Security (6.2% of $60,000): −$3,720
- Medicare (1.45% of $60,000): −$870
- Taxable income after 401(k) and standard deduction: $40,300
- Federal income tax: about −$4,588 (10% on the first $12,400, then 12% on the remaining $27,900)
- Approximate net pay: $47,222
FICA is calculated on the full $60,000 in gross wages. A traditional 401(k) contribution lowers your federal income tax but not your Social Security or Medicare withholding.2Internal Revenue Service. Topic No. 401, Wages and Salaries Adding state income tax, health premiums, or other deductions would pull the net figure lower.
When Gross Matters and When Net Matters
Loan and lease applications typically ask for gross income, not net. Lenders prefer it because it’s standardized and doesn’t shift based on how much you put into a 401(k) or which health plan you picked. They divide your monthly debt payments by your gross monthly income to get a debt-to-income ratio, which tells them how much you can borrow.
Your net income is the number that should drive your household budget. Committing to a mortgage or car payment sized to your gross pay, without accounting for taxes, retirement savings, and insurance, can stretch you thin fast. Before you sign a loan, work out your actual take-home pay and confirm the payment fits inside it.
A Note for Self-Employed Workers
If you’re self-employed, “gross” doesn’t mean the same thing it means for an employee. Your gross income is total business revenue before expenses. You subtract business costs — supplies, rent, mileage, software — from gross receipts to find net profit, which you report on Schedule C.
Self-employed workers pay both the employer and employee sides of payroll tax, called self-employment tax. The combined rate is 12.4% for Social Security on net earnings up to $184,500,8Social Security Administration. Contribution and Benefit Base plus 2.9% for Medicare, totaling 15.3%. You can deduct half of your self-employment tax when calculating adjusted gross income.12Internal Revenue Service. Topic No. 554, Self-Employment Tax The additional 0.9% Medicare tax applies once your net self-employment income exceeds $200,000.