Tax & income

Gross pay vs. net pay: Definition, Formula and Example

Gross pay is earnings before paycheck deductions; net pay is the amount remaining after the deductions applied to that paycheck.

Scope: Paycheck concept; linked tax tools use their explicitly labeled U.S. tax years and assumptions.

Other names and related labels: Take-home pay; Paycheck deductions.

How it works

Deductions can include income-tax withholding, payroll taxes, retirement deferrals and insurance. Pretax and after-tax items can affect different tax bases. Annual salary, pay frequency and taxable wages are related but not interchangeable.

Net pay = gross pay − employee deductions − withheld taxes

Use the same pay period and avoid deducting an item twice. Employer-paid benefits are not automatically employee paycheck deductions.

A $2,000 gross paycheck

Assume $300 tax withholding, $100 retirement deferral and $80 insurance deduction.

  1. Total deductions: $300 + $100 + $80 = $480.
  2. Net pay: $2,000 − $480 = $1,520.

The illustrated take-home amount is $1,520.

Deductions are given final amounts; this example does not calculate their tax treatment or final annual tax.

The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.

Withholding and final tax liability are different

A refund can result when payments and refundable credits exceed the annual liability. Also, biweekly pay usually has 26 periods per year, whereas twice-monthly pay has 24; they are not the same frequency.

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Sources and checks

Calculation methodology and review status · All glossary terms