Gross income is the full amount you earn before anything is taken out; net income is what remains after taxes, benefit premiums, and other deductions are subtracted. The gap between gross vs net income is often larger than people expect. Someone earning $70,000 a year in gross pay might see roughly $52,000 to $56,000 land in the bank across the year, depending on where they live and which benefits they carry. Understanding what fills that gap is how you budget from the right number and avoid surprises at tax time.
What Counts as Gross Income
Federal tax law defines gross income broadly: income from essentially any source, unless a specific rule excludes it.1Office of the Law Revision Counsel. 26 USC 61 Gross Income Defined For most workers, that starts with wages, salary, and hourly pay, and then extends to bonuses, tips, commissions, and fringe benefits.2eCFR. 26 CFR 1.61-1 Gross Income Beyond your paycheck, it also captures interest on savings accounts, dividends, rental income, capital gains, alimony received under older divorce agreements, and prizes or awards with monetary value.
Non-cash compensation gets swept in too. Personal use of a company car has a value that counts as income. Group-term life insurance coverage above $50,000 triggers taxable income on the excess. Even an employee achievement award can be taxable if it doesn’t meet narrow exclusion rules.3Internal Revenue Service. Taxable Fringe Benefit Guide The practical rule: if you received something of value during the year that isn’t specifically excluded by law, it probably belongs in gross income.
The Mandatory Taxes That Come Out First
Before you see a dollar of pay, employers are legally required to withhold several categories of tax. This is the biggest reason net pay looks so different from gross pay.
Social Security and Medicare
The largest bite comes from FICA. For 2026, Social Security tax is 6.2% of wages up to a wage base of $184,500, and Medicare tax is 1.45% with no cap.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide Your employer pays a matching amount separately. On a $70,000 salary, roughly $5,355 goes to FICA before anything else is calculated.5Social Security Administration. Contribution and Benefit Base
Once earnings cross $184,500 in a calendar year, Social Security withholding stops, but the 1.45% Medicare tax continues on every dollar above. High earners also face an additional 0.9% Medicare surtax on wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly.6Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Employers must begin withholding the extra 0.9% once an employee’s wages pass $200,000, regardless of filing status.
Federal Income Tax Withholding
Federal income tax is withheld from each check based on the information you provide on Form W-4, including filing status and any adjustments for dependents or other income.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide The federal system uses seven brackets running from 10% to 37%. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household, which effectively shields your first dollars of income from federal income tax.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
State and Local Income Taxes
Most states impose their own income tax, with top marginal rates running from around 1% to over 13%. Eight states levy no individual income tax at all, and residents in those states keep a noticeably larger share of gross pay. Some cities and counties also add a local income tax, typically 1% to 3%. In a high-tax state, this layer alone can shrink net income by thousands of dollars a year compared to the same gross pay in a no-tax state.
Voluntary Deductions That Shrink the Rest
After mandatory taxes, most paychecks also carry voluntary deductions you elected during benefits enrollment. How these are treated for tax purposes divides them into two groups.
Pre-Tax Deductions
Pre-tax deductions come out of gross pay before income taxes are calculated, which lowers taxable income for that pay period. Common examples:
- Traditional 401(k) or 403(b) contributions. For 2026, you can defer up to $24,500 into these accounts, and workers age 50 and older can add another $8,000 in catch-up contributions. These deferrals are not subject to federal income tax withholding when contributed, but they are still subject to FICA.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 20269Internal Revenue Service. 401(k) Plan Overview
- Employer-sponsored medical, dental, and vision premiums, which typically reduce both income tax and FICA liability.
- Health Savings Account contributions if you have a high-deductible health plan, up to $4,400 for self-only coverage or $8,750 for family coverage in 2026.10Internal Revenue Service. Expanded Availability of Health Savings Accounts Under the One, Big, Beautiful Bill Act
- Flexible Spending Accounts. Health care FSAs allow up to $3,400 in pre-tax contributions for 2026.
Every dollar routed into a pre-tax account reduces the income reported on your W-2, which is why maxing out a 401(k) can meaningfully change your tax picture even while it reduces immediate take-home pay.
Post-Tax Deductions
Post-tax deductions come out after taxes are calculated, so they don’t lower your current tax bill. Roth 401(k) contributions are the most significant example: you pay tax on those contributions now, and qualified withdrawals in retirement come out tax-free.11Internal Revenue Service. Roth Comparison Chart Other post-tax items might include supplemental life insurance, disability insurance beyond what an employer provides, or after-tax contributions to retirement plans that allow them.12Internal Revenue Service. Retirement Topics – Contributions
Adjusted Gross Income Sits in the Middle
Between gross income and the final tax calculation sits adjusted gross income, or AGI. Your AGI is gross income minus a specific set of deductions the IRS calls “adjustments to income” or “above-the-line” deductions.13Internal Revenue Service. Definition of Adjusted Gross Income These adjustments are subtracted before you choose between the standard deduction and itemizing, which is why they carry real weight.
Common above-the-line deductions include contributions to a traditional IRA, student loan interest, the deductible portion of self-employment tax, educator expenses, and health insurance premiums for self-employed individuals.14Office of the Law Revision Counsel. 26 US Code 62 – Adjusted Gross Income Defined Your AGI then determines eligibility for a long list of tax benefits. Many credits and deductions phase out above certain AGI thresholds, so two households with identical gross income can owe very different amounts of tax depending on how much each can subtract to reach AGI.
What Net Income Looks Like on a Paystub
Net income is what remains after every mandatory tax, voluntary deduction, and benefit premium has been subtracted from gross pay. On your paystub, this is the number labeled “net pay,” and it matches the deposit that hits your bank account. Your net income, not your salary, is the actual purchasing power for rent, groceries, and everything else.
The math gets concrete quickly. Someone earning $85,000 in gross salary might assume they have $7,083 per month to work with, but after federal and state taxes, FICA, health insurance, and a modest 401(k) contribution, the actual monthly deposit could be closer to $4,800 to $5,300. Budgeting from gross income instead of net income is one of the most common financial mistakes, and it’s the reason some households feel stretched despite a solid salary.
The paystub itself lays out the full journey. Gross appears at the top, followed by each withholding line: federal income tax, state income tax if applicable, Social Security, Medicare, and then your voluntary deductions for insurance, retirement, and any other benefits. Net pay at the bottom should equal gross minus the sum of every line between. Review it at least once a quarter. Payroll errors happen more often than you’d expect, and catching a miscoded benefit deduction or an outdated W-4 early saves a painful reconciliation later.
Gross vs Net for the Self-Employed
If you work for yourself, no employer is splitting FICA with you, so you pay both halves. The self-employment tax rate is 15.3% on net earnings: 12.4% for Social Security up to the $184,500 wage base, and 2.9% for Medicare with no cap. Earnings above $200,000 for single filers trigger the same 0.9% Additional Medicare Tax that employees face, bringing the Medicare portion to 3.8% on income above that threshold.
The IRS lets self-employed workers deduct the employer-equivalent half of self-employment tax (7.65%) as an above-the-line adjustment, which reduces AGI. Self-employed individuals who pay for their own health insurance can also deduct those premiums, including medical, dental, and vision coverage for themselves and their families, provided they weren’t eligible for an employer-subsidized plan during the same months.15Internal Revenue Service. Instructions for Form 7206 That deduction reduces AGI but cannot lower self-employment tax.
Because no employer withholds taxes from freelance or business income, self-employed workers make quarterly estimated tax payments. For 2026, those payments are due April 15, June 15, September 15, and January 15, 2027.16Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals Missing these deadlines or underpaying can result in an underpayment penalty. You can avoid it by paying at least 90% of your current-year tax or 100% of what you owed last year, or 110% if your AGI exceeded $150,000.17Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
When a Garnishment Takes More Off the Top
Sometimes deductions are forced on you by court order or government action. These involuntary deductions, commonly called garnishments, reduce net pay further and take priority over most voluntary deductions. Common reasons include unpaid child support, defaulted student loans, back taxes, and creditor judgments.
Federal law caps how much a creditor can take from your disposable earnings, defined as gross pay minus mandatory tax withholdings. For ordinary consumer debt, the maximum garnishment is the lesser of 25% of disposable earnings or the amount by which those earnings exceed 30 times the federal minimum wage per week. Child support orders can take considerably more: up to 50% if you’re supporting another spouse or child, or 60% if you’re not, with an additional 5 percentage points allowed if support is more than 12 weeks overdue.18Office of the Law Revision Counsel. 15 US Code 1673 – Restriction on Garnishment IRS tax levies follow their own rules and can sometimes take an even larger share.
Gross and Net Income for a Business
For businesses, the two terms describe different lines of the income statement. Gross income (often called gross profit) is total revenue from sales minus the cost of goods sold, which covers the direct expenses of producing whatever the company sells, such as raw materials and production labor. Overhead like office rent, marketing, and administrative salaries is not part of that first calculation.
Net income appears at the bottom of the income statement, after subtracting operating expenses, interest, taxes, and depreciation from gross profit. A company with strong revenue but high overhead can report slim or even negative net income, which is why investors focus on the bottom-line figure rather than top-line sales. Consistently positive net income signals a business that can reinvest in growth, service its debt, and pay dividends.