If you've ever been surprised that your paycheck is smaller than your salary suggests, you've run into the difference between gross pay and net pay. Understanding the gap helps you budget and spot mistakes.
What is gross pay?
Gross pay is the total amount you earn before any deductions. For a salaried employee, it's your annual salary divided by the number of pay periods. For an hourly worker, it's your hourly rate multiplied by hours worked, plus any overtime.
What is net pay?
Net pay is what's left after taxes and deductions come out of gross pay. It's the amount actually deposited into your account.
Net pay = Gross pay − (taxes + benefits + other deductions)
A worked example
Say you earn $5,000 per month in gross pay:
| Item | Amount |
|---|---|
| Gross pay | $5,000 |
| Federal income tax | −$550 |
| Social Security (6.2%) | −$310 |
| Medicare (1.45%) | −$72.50 |
| Health insurance | −$200 |
| Net pay | $3,867.50 |
Why the distinction matters
- Budgeting — plan around net pay, not gross.
- Loan applications — lenders look at both numbers.
- Negotiating — job offers quote gross, so factor in your effective take-home.
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