Gross Pay vs. Net Pay: What's the Difference?

When you accept a job offer for $50,000 a year, you won't see $50,000 land in your bank account. The difference between the number on your offer letter and the number on your deposit is the difference between gross pay and net pay. Understanding both helps you budget accurately and avoid surprises on payday.

What is gross pay?

Gross pay is the total amount you earn before anything is taken out. For hourly workers, it's your hourly rate times the hours you worked, plus any overtime, tips or bonuses. For salaried workers, it's your annual salary divided by the number of pay periods. Job offers, raises and most salary comparisons are expressed in gross terms. If you're paid by the hour, you can estimate yours with our guide on how to convert hourly wage to salary.

What is net pay?

Net pay — often called take-home pay — is what's left after taxes and deductions. It's the amount actually deposited into your account, and it's the number you should use when planning rent, groceries and savings.

What comes out of gross pay?

Mandatory taxes

• Federal income tax: withheld based on your income and the information on your Form W-4.
• Social Security tax: 6.2% of wages, up to an annual wage limit.
• Medicare tax: 1.45% of all wages, with an additional 0.9% on high earners.
• State and local income tax: depends on where you live and work. Some states have none.

Pre-tax deductions

These come out before income tax is calculated, which lowers your taxable income. Common examples include traditional 401(k) contributions, health insurance premiums, and health savings account (HSA) contributions.

Post-tax deductions

These come out after taxes, such as Roth 401(k) contributions, some life insurance, union dues and wage garnishments.

A worked example

Say you earn $2,000 gross every two weeks. Social Security takes $124 (6.2%) and Medicare takes $29 (1.45%). Suppose $100 goes to a traditional 401(k), $60 to health insurance, about $150 to federal income tax and $70 to state income tax. Total deductions: $533. Your net pay is about $1,467, or roughly 73% of gross.

Your exact numbers will differ based on your filing status, state, benefits and withholding choices, but this example shows why take-home pay is usually a good deal lower than gross pay.

Why the difference matters

Budgeting from gross pay is one of the most common money mistakes. If you plan to spend $4,000 a month because your gross monthly salary is $4,000, you'll come up short every month. Build your budget from net pay, and use gross pay for comparing jobs and negotiating.

How often you're paid also changes the size of each paycheck — read bi-weekly vs. semi-monthly pay to see how. And if you work extra hours, our explainer on overtime pay shows how those hours add to your gross.

Estimate your gross pay first

A good starting point is knowing your gross pay for every period. The free Hourly to Salary Calculator shows annual, monthly, bi-weekly, weekly and daily gross pay instantly. From there, subtract your expected deductions to estimate take-home pay.