Gross vs Net Income — Understanding the Difference
Gross income is your total earnings before any deductions. Net income is your take-home pay after taxes and deductions. The difference between gross and net can be 20% to 35% depending on your income, your state, and your pre-tax deductions like 401k and health insurance. This guide shows you exactly where your money goes.
What is Gross Income? — Your Total Earnings Before Deductions
Gross income is your total earnings before any taxes or deductions are taken out.
This is the amount your employer agrees to pay you.
For salaried employees, gross income is your annual salary divided by the number of pay periods.
For example, if you earn $60,000 per year and get paid biweekly, your gross income per paycheck is $2,307.69.
For hourly employees, gross income is your hourly rate multiplied by the number of hours you worked.
For example, if you earn $25 per hour and work 40 hours, your gross income is $1,000 for that week.
Gross income includes:
- Your base salary or wages
- Overtime pay
- Bonuses
- Commissions
- Tips
On your pay stub, gross income is usually at the top before any deductions are listed.
What is Net Income? — Your Take-Home Pay After Deductions
Net income is the amount you actually receive in your bank account on payday.
This is your take-home pay.
Net income is calculated by taking your gross income and subtracting all taxes and deductions.
These include:
- Federal income tax
- State income tax
- Social Security tax
- Medicare tax
- 401k contributions
- Health insurance premiums
- Any other deductions
For most workers, net income is between 65% and 80% of gross income.
The exact percentage depends on your tax bracket, your state, and the deductions you choose.
On your pay stub, net income is usually at the bottom after all deductions have been listed.
This is the number you should use for budgeting your monthly expenses.
Key Differences — Gross vs Net Income at a Glance
- Gross income is your total earnings before any deductions.
- Net income is your take-home pay after all deductions.
- Gross income is higher than net income.
- Net income is lower than gross income.
- Gross income is used for job offers and loan applications.
- Net income is used for budgeting and daily expenses.
- Gross income determines your tax bracket.
- Net income determines your spending power.
- Gross income includes overtime and bonuses.
- Net income reflects what you actually get after taxes on that overtime and bonuses.
- Gross income does not account for your 401k contributions.
- Net income already has your 401k contributions deducted.
What Gets Deducted from Gross Pay? — Complete List of Deductions
Real Example — Gross vs Net Income on a $60,000 Salary in Texas
Gross vs Net Income Percentage — What Percentage Do You Actually Take Home?
For most workers, net income is between 65% and 80% of gross income.
The exact percentage depends on your tax bracket, your state, and your pre-tax deductions.
In a state with no income tax like Texas, a single person with no dependents can expect net income to be about 75% to 80% of gross income.
In a high-tax state like California, a single person with no dependents can expect net income to be about 65% to 70% of gross income.
At lower income levels where you are in the 10% tax bracket, net income is about 85% of gross.
At middle income levels where you are in the 22% tax bracket, net income is about 75% of gross.
At higher income levels where you are in the 35% tax bracket, net income is about 65% of gross.
If you contribute to a 401k, your net income will be slightly lower, but you are saving for retirement and paying less in taxes.
The money you put into your 401k grows tax-free until retirement.
Gross vs Net Income on Your Pay Stub — How to Read Your Paycheck
Your pay stub contains important information about your earnings and deductions. Understanding it helps you verify that your employer is calculating everything correctly.
Gross pay is usually at the top of your pay stub. It shows your total earnings for that pay period before any deductions.
Federal income tax withholding shows how much your employer sent to the IRS.
State income tax withholding shows how much your employer sent to your state.
Social Security tax shows 6.2% of your gross pay up to the annual limit.
Medicare tax shows 1.45% of all your gross pay.
401k contribution shows how much you are saving for retirement.
Health insurance premium shows your share of the company health plan.
YTD stands for Year-to-Date. These numbers show the total amounts deducted since January 1st.
Net pay is at the bottom of your pay stub. This is your take-home pay, the amount that gets deposited into your bank account.
Always check your pay stub against our calculator to make sure your deductions are correct.
Why Net Income Matters for Budgeting — Always Use Net, Not Gross
One of the biggest mistakes people make is budgeting based on their gross income.
Your gross income is not what you actually have available to spend.
Your net income is your real spendable money.
Always create your budget using your net income, not your gross income.
If you budget based on gross, you will think you have more money than you actually do.
The 50/30/20 rule is a popular budget method using net income:
- Spend 50% of your net income on needs like rent, groceries, and utilities
- Spend 30% on wants like dining out, entertainment, and shopping
- Save 20% for emergency fund, retirement, and debt payments
Your rent or mortgage should not exceed 30% of your net income.
Your total debt payments should not exceed 36% of your net income.
Track your spending for one month to see where your net income is going.
Use our calculator above to see your exact net income based on your salary and deductions.
Gross vs Net Income — How It Works for Businesses vs Individuals
Gross vs Net Income Calculator — See Your Take-Home Pay
Use the calculator below to see your exact take-home pay based on your salary, deductions, and tax situation.
Calculator Inputs
Annual Salary — Enter your yearly income before taxes. Default is $60,000.
Pay Frequency — Choose how often you get paid. Options include weekly, biweekly, semi-monthly, or monthly.
401k Contribution — Enter what percentage of your salary you contribute to your 401k. Default is 5%.
Health Insurance — Enter how much you pay for health insurance per paycheck.
HSA Contribution — Enter how much you contribute to your Health Savings Account per paycheck.
State — Select the state where you live. This determines your state income tax rate.
Frequently Asked Questions — Gross vs Net Income
Gross income is your total earnings before any deductions. Net income is your take-home pay after taxes and deductions.
Subtract all taxes and deductions (federal tax, state tax, Social Security, Medicare, 401k, health insurance, etc.) from gross income.
Common deductions include federal income tax, state income tax, Social Security, Medicare, 401k contributions, and health insurance premiums.
401k contributions are usually deducted from gross income before taxes (pre-tax for traditional 401k).
Health insurance is typically deducted from gross pay before taxes if offered as a pre-tax benefit.
Net income is usually 65% to 80% of gross income, depending on taxes and deductions.
Because taxes (federal, state, Social Security, Medicare) and deductions (401k, insurance, etc.) are taken out before you receive your pay.
Gross pay is at the top of your pay stub. Net pay is at the bottom after all deductions.
Always budget based on net income, because that is your actual spendable money.
Related Calculators You May Find Useful
Main Paycheck Calculator — Calculate take-home pay for any state including federal, state, and local taxes.
Net Pay Calculator — See your net income after all deductions including taxes, 401k, and health insurance.
401k Calculator — See how retirement contributions affect your paycheck and how your savings grow over time.
Tax Bracket Calculator — Find your marginal federal and state tax brackets based on your income and filing status.
Hourly to Salary Calculator — Convert your hourly wage to annual, monthly, biweekly, and weekly salary.
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