Gross vs net pay: where your paycheck goes before it reaches you

The lines between gross and net

Every pay stub follows the same logic: start with what you earned, take away taxes, take away deductions. The order matters, because some deductions come out before taxes are calculated and lower your tax.

1. Gross pay: hours times rate, plus overtime, tips or bonuses; or your salary divided by the number of pay periods.
2. Pre-tax deductions: health, dental and vision premiums through a cafeteria plan, health FSA or HSA contributions, and traditional 401(k) or 403(b) contributions.
3. Taxes: federal income tax withholding based on your W-4; Social Security (6.2%) and Medicare (1.45%); and state or local income tax where they apply.
4. After-tax deductions: Roth retirement contributions, some insurance, union dues and any garnishments.
5. Net pay: what is deposited.

Not every pre-tax deduction is pre-tax for everything

This trips up a lot of calculators. Pre-tax health premiums paid through a cafeteria plan are generally excluded from income tax and from Social Security and Medicare. Traditional 401(k) contributions generally reduce wages for income tax, but are still subject to Social Security and Medicare. That is why box 1 of your W-2 (wages for income tax) can be lower than boxes 3 and 5 (Social Security and Medicare wages).

A worked paycheck

Which lines you control

• Federal withholding, through your W-4. If you get a large refund every year, you may be having more withheld than necessary; if you owe, too little. The IRS Tax Withholding Estimator helps you set it.
• Benefit choices, at hiring and each open enrollment: plan level, FSA or HSA amounts.
• Retirement contributions, which you can usually change any time.

Social Security, Medicare and most state taxes are not choices, but knowing their rates lets you check your stub for errors.

Salary to paycheck

To estimate gross pay per check from a salary, divide by the number of pay periods: 52 for weekly, 26 for biweekly, 24 for semimonthly and 12 for monthly. A $46,800 salary is $1,800 per biweekly check, but $1,950 on a semimonthly schedule. Biweekly workers get two months a year with three paychecks, which is a useful moment to boost savings.

Use net pay everywhere

Rent limits, budget splits and savings targets work best on net pay, because that is the money you can actually spend. Recheck your net pay whenever something changes: a raise, a new benefit choice, a new state or the start of a new year, when tax tables and wage bases update.

When the numbers look wrong

Compare each new stub with the previous one. If net pay drops without a reason you recognise, check these in order: hours or pay rate, a new or changed deduction, a change in withholding, and the pay period dates. A first paycheck at a new job may cover only part of a period, and the first check of a new year may reflect new benefit elections. If a line still does not make sense, ask payroll for an explanation in writing; mistakes are easier to fix in the same year.