Gross Pay vs Net Pay: Understanding Your Paycheck
Getting your first job offer is an incredibly exciting moment. Let's say you accept a position paying $60,000 a year. You do some quick math: $60,000 divided by 12 months is $5,000 a month. You start budgeting for a nice apartment and a new car.
Two weeks later, your first paycheck arrives, and it is significantly smaller than you expected. Where did the rest of your money go?
Welcome to the painful reality of Gross Pay vs. Net Pay.
What is Gross Pay?
Gross Pay is the total amount of money you earn before any taxes or deductions are taken out.
If your salary is $60,000 a year, your gross pay is exactly $60,000. If you are an hourly worker who makes $20 an hour and works 40 hours, your weekly gross pay is $800.
When you apply for a loan or sign a lease for an apartment, lenders generally look at your gross pay to determine if you qualify.
What is Net Pay?
Net Pay (often called "take-home pay") is the actual amount of money that gets deposited into your bank account on payday. It is your gross pay minus all mandatory taxes and voluntary deductions.
Net pay is the only number you should ever use when creating a personal monthly budget.
Where Does the Money Go?
The gap between gross and net pay is caused by a variety of deductions:
- Federal Income Tax: The IRS takes a cut based on your tax bracket.
- State & Local Income Tax: Most states (and some cities) take an additional cut.
- FICA Taxes (Payroll Taxes): You must pay 7.65% of your income to fund Social Security and Medicare.
- Health Insurance Premiums: If you get medical, dental, or vision insurance through your employer, your portion is deducted here.
- Retirement Contributions: If you contribute to a 401(k), the money is pulled out before the check hits your account.
Calculate Your Actual Take-Home Pay
If you are evaluating a new job offer or trying to figure out why your check looks a little light, don't try to calculate all the tax brackets manually.
Use our free Paycheck Calculator to factor in federal taxes, state taxes, and FICA deductions so you can see exactly what your true Net Pay will be!