Net is a post-tax figure. Whether the number describes your paycheck, your business’s earnings, or the profit on an investment sale, “net” always means what is left after taxes and any other required deductions come out of the larger gross (pre-tax) amount. Gross is the starting number; net is what you actually keep.
Net Pay on a Paycheck
For a W-2 employee, net pay is take-home pay. Your gross salary is the figure in your offer letter. Your net pay is what lands in your account after every deduction is pulled from that gross.
Federal and state income taxes usually make up the largest withholdings. Your employer calculates federal withholding from the information on your Form W-4, and most states impose their own income tax ranging from roughly 1% to over 13%, though several states have no income tax at all.
On top of income tax, your employer withholds payroll taxes under the Federal Insurance Contributions Act: 6.2% of wages for Social Security and 1.45% for Medicare, for a combined 7.65%.1Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax The Social Security portion only applies to wages up to an annual cap — $184,500 for 2026, which caps the tax at $11,439.2Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap, and an additional 0.9% Medicare tax applies to wages above $200,000 for single filers or $250,000 for married couples filing jointly.3Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
Voluntary items also come out before you see the money: health insurance premiums, 401(k) or 403(b) contributions, and any court-ordered garnishments. Whatever remains after every mandatory and voluntary subtraction is your net pay.
Net Earnings When You Are Self-Employed
If you freelance or run a sole proprietorship, clients pay you the full gross amount and no taxes are withheld. Your net earnings are what remains after you subtract legitimate business expenses — supplies, software, home office costs, mileage, and similar items — from your total 1099 income. You still owe tax on that net figure.
Self-employed workers pay both the employee and employer shares of Social Security and Medicare, a combined 15.3% (12.4% Social Security plus 2.9% Medicare).4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The headline rate is not applied to every dollar of net earnings, though. The tax base is 92.35% of net self-employment income, mirroring the fact that W-2 employees are not taxed on their employer’s matching share.5Internal Revenue Service. Topic No. 554, Self-Employment Tax On $100,000 of net earnings, the taxable base is $92,350.
You can then deduct half of your self-employment tax as an above-the-line adjustment on your income tax return, which lowers your adjusted gross income and your income tax bill.5Internal Revenue Service. Topic No. 554, Self-Employment Tax The 0.9% additional Medicare tax also applies to self-employment income above $200,000 for single filers or $250,000 for joint filers.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
Because no employer is withholding for you, the IRS expects quarterly estimated tax payments. Skipping them or underpaying triggers penalties even if you settle up when you file.6Internal Revenue Service. Estimated Taxes
Net Profit for a Business
For a corporation, net profit is the bottom line of the income statement: the amount left after subtracting cost of goods sold, operating expenses, interest, and taxes from total revenue. The federal corporate income tax is a flat 21% of taxable income.7Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed Net profit sits firmly after that tax — it is what the business actually earned once the tax obligation was satisfied, and it is the pool available for dividends or reinvestment.
If deductions exceed revenue and the business posts a net loss, the loss can generally be carried forward to reduce taxable income in future years. Net operating loss carryforwards are capped at 80% of taxable income in the year they are applied, so a business cannot fully erase a profitable year’s tax bill using past losses. At least 20% of that year’s taxable income stays subject to tax.8Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Net Gains on Investments
When you sell a stock, bond, or other capital asset, your gross gain is the sale price minus your cost basis. Your net realized gain is what remains after transaction fees and the tax on the gain. How much tax you owe depends on how long you held the asset.
Assets held for one year or less produce short-term capital gains, taxed at ordinary income rates ranging from 10% to 37% in 2026.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Assets held more than a year qualify for preferential long-term rates of 0%, 15%, or 20% depending on your taxable income.10Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed For a single filer in 2026, the 0% rate applies to taxable income up to $49,450, the 15% rate to income between $49,450 and $545,500, and the 20% rate above $545,500.
You do not pay tax on every winning trade in isolation. The IRS requires you to net gains and losses within the same holding-period category first, short-term against short-term and long-term against long-term. A net loss in one category then offsets a net gain in the other.11Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses If total losses exceed total gains for the year, you can deduct up to $3,000 of the net loss against ordinary income ($1,500 if married filing separately).12Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Anything beyond that carries forward indefinitely.13Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Higher earners face an additional 3.8% net investment income tax on capital gains, interest, dividends, rental income, and royalties when modified AGI exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.14Internal Revenue Service. Net Investment Income Tax The 3.8% applies to the lesser of net investment income or the amount by which modified AGI exceeds the threshold.15Internal Revenue Service. Topic No. 559, Net Investment Income Tax For an investor already in the 20% long-term bracket, the effective federal rate on gains can reach 23.8%.
Net rental income follows the same logic: gross rent collected minus operating expenses like mortgage interest, insurance, repairs, management fees, utilities, property taxes, and depreciation.16Internal Revenue Service. Publication 527, Residential Rental Property The remaining net figure is taxed at ordinary income rates and may also be hit by the 3.8% net investment income tax.
Net Income Is Not the Same as AGI
One point of confusion worth clearing up: adjusted gross income (AGI) is also an “after-deductions” number, but it is not your net income. AGI is your total gross income from all sources minus a specific set of above-the-line adjustments the tax code allows before your tax is calculated.17Internal Revenue Service. Adjusted Gross Income It appears on line 11 of Form 1040.
Common adjustments include traditional IRA and health savings account contributions, student loan interest, educator expenses, and the deductible half of self-employment tax. These reduce AGI but are not the payroll withholdings that reduce your paycheck. Take-home pay is a payroll concept. AGI is a tax-return concept. Both are smaller than gross, but they answer different questions and rarely match.