Gross Pay Vs. Net Pay: What's the Difference and Why It Matters

You're juggling schedules, managing your crew, and keeping customers happy. Then payroll day hits and you're second-guessing every calculation.

Here's the thing: understanding gross pay vs. net pay isn't just accounting busywork. Get these numbers wrong and you're facing employees wondering why their paychecks are short, surprise tax bills from the IRS, or worse—both at the same time.

Whether you're cutting checks for your bakery team or figuring out what you can actually afford to pay yourself, knowing the difference between gross and net pay affects everything from hiring decisions to keeping the lights on.

TL;DR: Gross Pay vs. Net Pay Explained

Need to understand payroll basics for your team? Here's what every business owner should know:

• Gross pay is the total amount your employee earns before any deductions (the salary you discuss when hiring)
• Net pay is what hits their bank account after taxes and deductions are removed (their actual take-home)
• Mandatory deductions include federal taxes, state taxes, Social Security (6.2%), and Medicare (1.45%)
• Voluntary deductions cover health insurance, 401(k) contributions, and other benefits your team chooses
• Getting it wrong can lead to tax penalties, compliance issues, and unhappy employees
• Payroll software automates these complex calculations and keeps you compliant

Understanding both numbers helps you budget accurately and build trust with your team from day one.

Quick answer: The difference between gross pay and net pay

Here's what you need to know about gross pay vs. net pay:

Gross pay = total earnings before anything comes out

• Regular wages + overtime + bonuses + commissions
• The number you discuss in job offers
• What tax brackets and loan applications look at

Net pay = actual take-home after all deductions

• What deposits into your bank account
• The only number that matters for budgeting
• Typically 25-35% less than gross pay

Bottom line: Budget with net pay, negotiate with gross pay. Employers need to track both—gross for labor costs and tax reporting, net for payroll cash flow and employee expectations.

Payroll math making your head spin? The right payroll tools handle the calculations for you while you focus on running your business.

What is gross pay?

Gross pay, or gross salary, is the total amount your employee earns before any deductions. For hourly workers, this means their base wages, overtime pay, bonuses, and commissions all added together. 

For salaried employees, it's their annual salary broken down into pay periods, plus any additional compensation like bonuses.

Is gross pay before or after taxes?

Gross pay is before taxes and deductions. It's the full amount you earn. When you're hiring someone at "$50,000 a year" or "$20 per hour," you're talking about gross pay. It's also what the government looks at to determine tax brackets and what lenders check for on loans.

What gross pay includes for hourly vs. salaried employees

Hourly workers: Base wages + overtime (usually 1.5x) + bonuses + commissions

Salaried employees: Annual salary ÷ pay periods + bonuses + additional compensation

For example: 

Your employee makes $20/hour and worked 45 hours this week. 

Regular pay: $20 × 40 hours = $800. 

Overtime pay: $30 × 5 hours = $150. 

Total gross pay = $950.

What is net pay?

Net pay is what your employees actually receive after all deductions have been taken from their gross pay. These deductions include:

• Federal and state taxes
• Social Security and Medicare
• Health insurance premiums
• Retirement contributions
• Other voluntary deductions

This "take-home pay" gives your team a true picture of their spending power. When employees budget for rent or plan major purchases, they need to know their net pay.

Is net pay after taxes?

Yes, net pay is after taxes and all other deductions. This is the amount that deposits into your bank account. This "take-home pay" gives your team a true picture of their spending power. When employees budget for rent or plan major purchases, they need to know their net pay.

Pre-tax vs. post-tax deductions

Not all deductions hit your paycheck the same way. Some come out before taxes (saving you money), others come out after (costing you more).

Pre-tax deductions include traditional 401(k) contributions, HSA, health insurance premiums, FSA, and commuter benefits. These reduce your taxable income before income taxes are calculated. 

Pre-tax deductions give you an immediate tax break. If you contribute $200 to a traditional 401(k), your taxable income drops by $200—meaning you pay less in income taxes that pay period.

Post-tax deductions are taken after taxes. These include: Roth 401(k), supplemental life insurance, and wage garnishments.

Here's why this matters: When you're choosing benefits during open enrollment, knowing which deductions are pre-tax can save you real money. 

A $200 pre-tax deduction might only reduce your take-home pay by $150 after tax savings. But a $200 post-tax deduction? That's $200 straight out of your pocket. Make sense of what affects net pay and you'll make smarter benefit choices.

Gross pay vs. net pay: Side-by-side comparison

What it is: Gross pay is the total amount earned before deductions. Net pay is what's left after all deductions—it's the actual amount your employees take home.

What it includes: Gross pay counts everything: regular wages, overtime, bonuses, commissions, and taxable reimbursements. Net pay is what remains after subtracting taxes, insurance premiums, retirement contributions, and any other deductions.

What it's used for: When you offer someone a job, you discuss gross pay. When they plan their monthly budget, they use net pay. Gross pay is also used for tax bracket determination and loan applications.

Whether taxes are applied: Taxes are calculated based on gross pay first. Then those taxes, along with other deductions, are subtracted to arrive at net pay.

What employees receive: Your team's paychecks or direct deposits show both numbers, but net pay is the amount that actually hits their bank accounts.

Which is better: Gross pay or net pay?

Neither is "better"—they serve different purposes. Use gross for job negotiations, understanding total compensation, and comparing job offers. Use net for budgeting, planning expenses, and knowing actual spending power.

Which amount is larger: Gross pay or net pay?

Gross pay is always larger because net pay is what remains after deductions. Net pay is usually 65-75% of gross pay, depending on tax bracket and deductions.

What is deducted from gross pay?

The journey from gross to net involves two types of deductions: the ones you can't avoid and the ones you choose.

Mandatory deductions: What's required by law

Federal income tax: Based on W-4 and tax brackets. The percentage increases as income rises.

State and local income tax: Varies by state. Nine states don't charge income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Social Security (FICA): Employers and employees each contribute 6.2% of wages up to $176,100 (2025 limit).

Medicare (FICA): Employers and employees each pay 1.45% with no wage cap.

Additional Medicare tax: 0.9% over $200,000 for single filers.

Wage garnishments: Court-ordered deductions for unpaid taxes, child support, student loans, or other legal obligations.

Voluntary deductions: Benefits you choose

Retirement contributions: 401(k) or similar retirement plans.

Health insurance premiums: Medical, dental, and vision coverage.

FSA/HSA contributions: Tax-advantaged medical savings.

Life and disability insurance: Income protection coverage.

Mandatory vs. voluntary deductions: What's the difference?

Mandatory deductions are required by law—non-negotiable for you and your employees. Voluntary deductions are employee choices, but once someone elects them, you must deduct them accurately every pay period. Both reduce take-home pay, but voluntary deductions often come with tax benefits that soften the hit.

How to read a pay stub: Finding gross and net pay

Your pay stub has three main sections: 

1. Gross earnings (regular hours, overtime, bonuses)
2. Deductions (tax withholdings, insurance, retirement)
3. Net pay (final take-home amount).

Where do I find my net pay? It’s usually labeled "Net Pay" or "Total Pay."

Why do gross and net look so different? The typical 25-35% deduction rate creates a significant gap.

How to calculate gross pay

Figuring out gross pay calculations looks different depending on whether you're paying salaried or hourly employees. Here's the breakdown for both:

How to calculate gross pay for salaried employees

Take their annual salary and divide it by the number of pay periods. Example: $50,000 annually ÷ 26 biweekly pay periods = $1,923.08 per paycheck. Add any bonuses or commissions.

How to calculate gross pay for hourly employees

Multiply hourly rate by hours worked, add overtime pay (usually 1.5x), and include bonuses. Example: $20 × 40 hours = $800 regular. $30 × 5 hours = $150 overtime. Total gross = $950.

How to calculate net pay

Net pay calculation requires multiple steps and accurate deduction information. Here's how to get from gross to net.

Step-by-step net pay calculation

Step 1: Start with gross pay.

Step 2: Calculate mandatory deductions—federal tax, state tax, Social Security (6.2%), Medicare (1.45%), and Additional Medicare (0.9% if over threshold).

Step 3: Subtract voluntary deductions—health insurance, 401(k), FSA/HSA, other benefits.

Step 4: Gross pay - (mandatory + voluntary deductions) = Net pay.

Real-world example: California employee earning $67,600 annually

Say your employee is single and works in California. If they earn $67,600 annually ($2,600 biweekly), here's how their deductions break down:

Federal tax (22% bracket):

• 10% on first $11,600 = $1,160
• 12% on $11,601 to $47,150 = $4,265.88
• 22% on remaining $20,450 = $4,499
• Total federal: $9,924.88 annually ($381.73 biweekly)

California state tax: $2,868.24 annually ($110.32 biweekly)

FICA taxes:

• Social Security (6.2%): $161.20 biweekly
• Medicare (1.45%): $37.70 biweekly

Voluntary deductions:

• Health insurance: $125 biweekly
• 401(k) (5%): $130 biweekly

Total deductions: $945.95. Net pay: $1,654.05 biweekly—this is what hits their bank account every other Friday.

Note: This assumes single filing status, standard deduction, California residency for the 2024-2025 tax year. Your state and situation will differ.

How to calculate gross pay from net pay (reverse calculation)

Sometimes you know what you need to take home and need to work backwards. Here's how to figure out the gross pay required to hit your net pay target.

Why you'd need to calculate gross from net

Knowing how to calculate gross from net isn't just math—it's practical. Whether you're negotiating salary, planning your budget, or comparing job offers, working backwards from take-home pay helps you make smarter money decisions.

• Salary negotiations: You know you need $4,000 net to cover your bills—what gross salary do you actually ask for?
• Budget planning: Working backwards from your must-have expenses to figure out your required gross income.
• Job comparisons: Two offers with different benefit packages? Reverse-engineer both to see which actually pays more in your pocket.

The reverse calculation formula

If you know your typical deduction rate runs around 30-35%, you can estimate gross from any net amount.

Basic formula: Net pay ÷ (1 - total deduction rate) = Gross pay

Example: Working backwards from $5,000 net pay

Say you need $5,000 net per month to cover rent, bills, and living expenses. With a 36% deduction rate (taxes + benefits), here's the math:

$5,000 ÷ 0.64 = $7,812.50 gross needed monthly

That's $93,750 annually.

What does $5,000 net mean in real terms? Depending on your tax situation and benefit elections, you'll need anywhere from $6,500 to $7,800 gross to actually take home $5,000. That's a big range—which is why knowing your deduction rate matters.

Gross pay vs. net pay for budgeting and financial planning

Here's where the gross vs net distinction really matters: your monthly budget. Budget with gross pay and you'll constantly come up short. Budget with net pay and your money actually makes sense.

Why you should always budget with net pay

Net pay is your actual spending power. Budgeting with gross leads to overspending and debt. The rule: If it's not in your bank account, don't count it.

Planning for variable income when paid hourly

Calculate average net pay over 3 months and budget based on that average. Or budget on your lowest expected net and save excess from busier weeks.

Why gross vs. net pay matters for small business owners

Gross vs. net pay isn't just payroll terminology—it's the foundation of your labor costs, employee communications, and compliance requirements.

True labor cost calculation

A $50,000 salary doesn't cost you $50,000. Add employer payroll taxes (7.65% FICA minimum), federal unemployment tax ($42 per employee), state unemployment taxes, benefits, and workers' compensation. 

That same $50,000 salary actually costs your business $62,500-$70,000 annually when you factor in all employer expenses.

Communicating compensation clearly in job offers

Job offers list gross pay—that's what candidates compare across opportunities. But their first paycheck shows net pay, and the difference catches people off guard. Typical deductions run 25-35% of gross pay, meaning someone hired at $50,000 takes home around $32,500-$37,500 annually.

Set clear expectations by explaining how pre-tax benefits (401k, HSA, health insurance) reduce their net pay but add significant value to their total compensation package.

Payroll compliance and accurate record-keeping

Mixing up gross and net pay creates serious compliance problems. Gross pay determines tax withholding calculations, overtime rates, and FICA requirements. Net pay determines the actual cash you need in your payroll account. 

Getting these numbers wrong leads to tax penalties, underpayment disputes, and documentation failures during audits.

How Homebase simplifies gross-to-net calculations

Homebase payroll handles the entire gross-to-net calculation automatically. Our platform connects time tracking directly to payroll, applies the correct federal, state, and local tax rates for each employee's jurisdiction.

Homebase also generates detailed pay stubs showing every deduction, and maintains audit-ready records that satisfy IRS requirements.

Gross pay vs. taxable pay

Not all gross pay is taxable. Taxable pay = Gross pay - pre-tax deductions.

Pre-tax items include traditional 401(k) contributions, health insurance premiums, HSA, FSA, and commuter benefits. These lower your taxable income, reducing your income tax bill.

Example: $3,000 gross - $150 (401k) - $200 (health insurance) = $2,650 taxable pay. 

You pay income tax on $2,650, not $3,000.

Important note about FICA taxes: Traditional 401(k) contributions are still subject to FICA taxes (Social Security and Medicare), calculated on your full gross pay. However, HSA contributions, FSA contributions, and health insurance premiums made through a Section 125 cafeteria plan are exempt from FICA taxes. 

This means these deductions reduce both your income tax and your FICA tax, while 401(k) contributions only reduce income tax.

Stop guessing at payroll—let Homebase handle the math

Payroll math doesn't have to eat up your Sunday nights. Homebase automates the entire process—from calculating gross and net pay to filing your taxes—so you can focus on actually running your business.

What Homebase does:

• Automatically converts timesheets to payroll without the copy-paste nightmare
• Handles the math for hourly workers, salaried employees, overtime, and tips
• Calculates federal, state, and local taxes for every employee's jurisdiction
• Processes pre-tax and post-tax deductions without the headache
• Generates pay stubs that show exactly where every dollar went
• Stores everything you need for audits without the filing cabinet

Beyond payroll, you get scheduling, time tracking with photo verification and GPS, team messaging, and hiring tools—all in one place. No more juggling five different apps to manage your team.

Try Homebase free – Get 6 months free on any payroll plan.

“Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now our entire team logs in and out quickly and easily with the Homebase app, and all I have to do is send their hours to my payroll program with the click of a button.” — Kathleen Smith, Founder, Smiling Tree Toys

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FAQs about gross pay vs. net pay

Does net pay include taxes?

No—net pay is what you take home after taxes have been removed. If you earn $3,000 gross but pay $600 in taxes and $200 in deductions, your net pay is $2,200. That's what hits your bank account on payday.

Is salary quoted in gross or net?

Always gross. When a job says "$60,000 per year" or "$25 per hour," that's before deductions. Your actual take-home will be 25-35% less after taxes and benefits come out.

Do you pay taxes on gross or net?

You pay taxes on gross pay (minus pre-tax deductions). Net pay is what's left after taxes are already taken out—you never pay taxes on net.

How do bonuses affect net pay?

Bonuses increase gross pay but get hit with different tax withholding. Federal typically takes a flat 22% (37% over $1 million), plus FICA taxes and state taxes. A $5,000 bonus might only add $3,250-$3,750 to your actual paycheck.

What is the relationship between gross pay and net pay?

Net pay is always less than gross pay. Gross pay - (taxes + deductions) = Net pay. Gross is the starting point; net is what crosses the finish line.

Is take-home pay the same as net pay?

Yes. Both mean the same thing—the amount that lands in your bank account after everything gets deducted from gross pay.

What deductions reduce gross pay to net pay?

Federal income tax, state and local taxes, Social Security (6.2%), Medicare (1.45%), health insurance, 401(k) contributions, HSA or FSA, and voluntary deductions like life insurance.

Which is more important: gross or net pay?

Both matter. Use gross when comparing job offers or applying for loans. Use net for budgeting your rent, bills, and actual spending power.

Which is greater, gross pay or net pay?

Gross is always bigger. Net is what's left after deductions take their cut—typically 25-35% less than gross.

Is gross pay or net pay used for tax filing?

Tax brackets use your taxable income, calculated from gross pay. The IRS looks at gross minus certain adjustments (like pre-tax 401k) to figure out what you owe.