Gross pay is the total you earn before anything is taken out. Net pay, often called take-home pay, is what actually lands in your bank account after taxes, benefits, and other deductions. The gap between the two can be substantial, and net pay is the number you should build your budget around.
What is gross pay?
Gross pay is your full earnings for a pay period before any deductions. For a salaried employee, it is your annual salary divided by the number of pay periods. For an hourly worker, it is your hourly rate times the hours you worked, plus any overtime, bonuses, commissions, or tips. It is the headline number in a job offer and the figure lenders ask for, but you never receive the whole of it in cash.
Gross pay matters because it is the base everything else is calculated from. Income tax withholding, Social Security, Medicare, and percentage-based retirement contributions are all computed against your gross, not your take-home. When someone says they “make $70,000,” they almost always mean gross.
What is net pay?
Net pay is what is left after every deduction is subtracted from your gross. It is the amount your employer deposits, the money you can actually spend, save, or use to pay bills. Because deductions vary by person and by state, two people with identical gross salaries can take home very different amounts.
The deductions that create the gap fall into a few buckets:
Mandatory taxes
These come out of almost every paycheck. Federal income tax is withheld based on the W-4 you filed. Most states add their own income tax. On top of that sits FICA: a 6.2% Social Security tax on wages up to an annual limit and a 1.45% Medicare tax on all wages, for a combined 7.65% paid by the employee (IRS, Topic No. 751).
Pre-tax deductions
These are subtracted before income tax is calculated, which lowers your taxable income. Common ones are 401(k) contributions, health and dental insurance premiums, HSA or FSA contributions, and commuter benefits. They shrink your net pay now but reduce your tax bill.
Post-tax deductions
These come out after taxes are figured. Roth 401(k) contributions, wage garnishments, union dues, and some insurance add-ons fall here. They lower your take-home without lowering your taxable income.
A worked example
Here is how the math runs for a salaried worker. Say your gross pay for a two-week period is $2,500. The deductions might look like this:
- Federal income tax: $300
- State income tax: $110
- Social Security (6.2%): $155
- Medicare (1.45%): $36.25
- 401(k) contribution (5% pre-tax): $125
- Health insurance premium: $90
Total deductions come to $816.25. Subtract that from $2,500 and your net pay is $1,683.75. That is a 33% gap between what you earned and what you can spend.
- Net pay (take-home) $1,683.75
- Federal income tax $300
- FICA — Social Security + Medicare (7.65%) $191.25
- 401(k) (5% pre-tax) $125
- State income tax $110
- Health insurance $90
The exact figures shift with your tax bracket, state, and benefit choices, but a real difference of 25-35% between gross and net is common. You can run your own numbers with our income tax calculator.
Why net pay is the number for budgeting
Net pay is the only figure that reflects money you can actually move. If you build a budget around your gross salary, you will plan to spend dollars that were never going to reach you, and the shortfall shows up as overdrafts or credit-card balances at the end of the month. Always start a budget with take-home pay.
This is also why a raise feels smaller than it sounds. A jump in gross pay is partly absorbed by higher tax withholding and any percentage-based deductions, so your net rises by less than the headline figure. When you compare job offers, compare the net you would actually receive in each, not just the gross salaries side by side.
For a fuller picture of every line on your paycheck, read Understanding Your Paycheck (2026), and to decode each abbreviation and deduction code, see how to read your pay stub.
Frequently asked questions
Is gross or net pay used for a mortgage application?
Lenders use gross monthly income to calculate your debt-to-income ratio and how much you qualify to borrow. They work from gross because it is a consistent, pre-deduction figure. Just remember that the payment you can comfortably afford depends on your net pay, not the larger number underwriters use.
Why is my net pay so much lower than my gross?
The gap comes from stacked deductions: federal and state income tax, the 7.65% FICA contribution for Social Security and Medicare, plus any pre-tax benefits like a 401(k) or health insurance. Together these commonly take 25-35% of gross pay, which is why take-home can feel surprisingly small.
Does a raise increase gross or net pay?
A raise increases your gross pay directly. Your net pay rises too, but by less, because more tax is withheld and any percentage-based deductions (like a 5% 401(k)) scale up with the higher salary. This is normal, not a payroll error, and it is why net is the figure to track.
Is take-home pay the same as net pay?
Yes. Take-home pay and net pay are two names for the same thing: the amount deposited into your account after all taxes and deductions are subtracted from your gross. Some pay stubs label it “net pay,” others say “net” or “take-home,” but the meaning is identical.
Track the number that actually matters
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