Gross vs. Net Income: The Key Differences

If you’re trying to keep track of your finances, maintain budgets, and manage debt, understanding the difference between gross and net income can help you take better control of your financial situation.

In this article, we’ll discuss the key differences between gross and net income and how they are both calculated.

• Gross income: The total amount of income you earn from your hourly or salaried wages, including any bonuses, tips, or commissions.
• Net income: The money you have left after anything your employer or the government takes from your paycheck (like taxes, health insurance, employer retirement plans, or Social Security). ^[1]

What is gross income?

Your gross income represents the total amount of income you earn before any taxes or other deductions are taken.

For example, if your gross annual salary is $60,000, and your employer pays you monthly, your gross income would be $5,000 per month.

How gross income is calculated

For those earning an hourly wage, your gross income would be calculated by multiplying the number of hours worked by your hourly wage. So let’s say you earn $15 per hour and you work 120 hours in a month, your gross pay for the month would be: $15 x 120 hours = $1,800.^[1]

What is net income?

Your net income (also known as take-home pay) is the total amount of pay you take home after your employer or the government has made deductions like tax, 401(k) contributions, or wage garnishments.

How net income is calculated

How your net pay is calculated depends on several different payroll deductions; some of these are mandatory, while others are voluntary (more on these in the next section).

To calculate your net pay, use the following calculation:

1. Take your gross pay
2. Deduct pre-tax contributions like health insurance and 401(k) payments
3. Deduct taxes, including FICA taxes, federal income tax, and state and local taxes
4. Deduct any wage garnishments

This means if your gross income is $5,000 per month, and you have $2,000 worth of deductions, your net pay would be $3,000.^[2]

How payroll deductions work

Payroll deductions refer to money withheld from an employee’s total earnings that is put towards paying things like taxes and benefits (like health insurance).

Typical deductions from your gross pay can include, but are not limited to, the following:

Voluntary pretax deductions

Pretax deductions are taken from your paycheck before taxes, meaning they reduce your taxable income and the amount of money you have to pay the government in taxes. However, there is usually a cap on how much an employee can deduct from their paycheck before taxes, and the IRS sets limits on the total amount that you can pay into a 401(k) retirement plan each year before taxes ($23,000 for traditional and safe harbor plans as of 2025). Participants aged 50 and over at the end of the calendar year can also make catch-up contributions ($7,500 for traditional and safe harbor plans as of 2025). There are certain limitations and adjustments that apply to these contributions, full details of which can be found on the IRS’s page.^[3]

Examples of pretax deductions can include:

• Health insurance
• Group-term life insurance
• 401(k) retirement plans
• Job-related expenses (some states may prohibit these)^[4]

Statutory deductions

Statutory deductions are collected by the federal government to pay for public services. They include:

• Federal Insurance Contributions Act (FICA) taxes - These taxes are used to pay for Social Security and Medicare. Employees pay Social Security tax at a rate of 6.2% (with wage-based limits) and Medicare tax at a rate of 1.45% (with no cap) as of 2025. ^[4]
• Federal income tax - The federal government collects income tax from individuals; the taxable income in each bracket varies depending on each person’s filing status. This includes whether you are single, married and filing separately, married and filing jointly, or filing as head of household, which is noted on Form W-4. The IRS also makes yearly adjustments for inflation, which determine tax bracket thresholds. You usually have two options for withholding federal income tax in each pay period: the wage bracket method or the percentage method. You can find details of both of these in IRS Publication 15-T.
• State and local taxes - States and local authorities collect income tax in different ways; some charge a fixed rate, others have tax brackets, and some (such as New Hampshire and Florida) do not collect income tax at all.^[5]

Post-tax deductions

These deductions are taken from your net pay, after tax, meaning they don’t reduce the overall amount of tax you have to pay. Some examples of post-tax deductions include:

• Roth IRA retirement plans
• Disability insurance
• Union dues
• Charity donations
• Wage garnishments (like unpaid taxes, child support, alimony, or defaulted loans)^[4]

Should you use gross or net income for budgeting?

When planning your household budget for monthly expenses or long-term financial goals, your net income is generally the best figure to use. Your net income represents the money you have available to spend after taxes and other deductions are taken from your paycheck.

If you are using a budgeting tool to plan your finances, it’s important to understand which income figure you need to use and be consistent with it so you can avoid mistakes.

Avoiding budgeting mistakes

Certain mistakes can happen when calculating your budget using your income. Being aware of these can help you keep track of your finances and avoid confusion over how much money you have left to spend.

• Forgetting about taxes - If you’re employed, your employer will likely withhold federal income tax (and state or local income tax if applicable) from your paycheck and pay it to the government on your behalf. When you file your individual income tax return each year, you might have more tax to pay, or you may receive a tax refund.
• Counting expenses twice - If you use your net income, but you also include your deductions when using a budgeting tool, you’d be counting those deductions twice, as they have already been deducted to produce your net income figure.
• Incorrect paycheck periods - If you receive your paychecks weekly or bi-weekly instead of monthly, you could accidentally miscalculate your income. For example, if you get paid every two weeks, you’ll receive 26 paychecks each year, not 24, so you’ll need to calculate accordingly.^[6]

Tax implications

The amount of income tax you need to pay is calculated by the government using your gross income. If you are employed, you usually won’t need to worry about calculating this yourself, as your employer will calculate your taxes and other deductions for you when you complete Form W-4. The information you provide through this form tells your employer your filing status, multiple jobs adjustments, credits, other income, deductions, and any additional amounts to withhold from your paycheck. When you fill out Form W-4, you can work out how much your employer should be withholding in federal income tax from each paycheck. This can help you avoid paying too much or too little tax.^{[7] [8]}

There are a few situations that might complicate things when it comes to how much tax you need to pay:

• If you run a side hustle or small business, you may have to pay income tax on what you earn from that as well.
• If you have multiple jobs, your employers may not be calculating your income tax correctly.
• If you have a lot of tax deductions, you may end up with a bigger refund when you file your taxes, meaning you end up with more net income than you expected.
  If you’re unsure if you’re paying the correct amount of income tax, you could speak to a tax professional or an accountant to ensure your taxes are being calculated correctly.^[7]

Sources

1. Tax Foundation, “Gross Income Definition” https://taxfoundation.org/taxedu/glossary/gross-income/
2. ADP, “Gross Pay Vs Net Pay” https://www.adp.com/resources/articles-and-insights/articles/g/gross-pay-vs-net-pay.aspx
3. IRS, “Retirement Topics - 401(k) and Profit Sharing Plan Contributions” https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
4. ADP, “What Are Payroll Deductions?” https://www.adp.com/resources/articles-and-insights/articles/p/payroll-deductions.aspx
5. Tax Foundation, “State Individual Income Tax Rates and Brackets - 2025” https://taxfoundation.org/data/all/state/state-income-tax-rates/
6. NFCC, “Should You Use Gross or Net Income When You Are Budgeting?” https://www.nfcc.org/blog/should-you-use-gross-or-net-income-when-you-are-budgeting/
7. Synchrony, “Gross Income Vs Net Income: Key Differences Explained” https://www.synchrony.com/blog/bank/gross-income-vs-net-income
8. IRS, “Form W-4” https://www.irs.gov/taxtopics/tc753

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.

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