Gross pay vs. net income: What’s the difference?

Understanding your take-home pay can help you make informed money management decisions. If you work and earn a living through wages, you’ve probably seen gross and net income amounts on your pay stub. But figuring out how much take-home pay you’ve earned and how much goes to taxes and deductions can feel overwhelming. 

You may wonder: What’s the difference between my gross pay and my take-home income? Or: Where does all the money go that’s not in my take-home pay?

Key takeaways

• On your pay stub, gross income is your total income before taxes and deductions are subtracted.
• Net income is your take-home pay—or the amount of money left over after deductions and taxes are withheld.
• Net income deductions can include taxes, employee benefit premiums and wage garnishments.

Gross pay is the total amount of income you receive as wages before any taxes or other deductions are withheld by your employer. Deductions may include things like federal and state income tax withholding, employee benefit premiums like dental and health insurance, or 401(k) retirement account contributions. 

If you’re a salaried employee with one income source, your gross pay is your annual salary before taxes. If you’re an hourly employee with one income source, you can multiply the number of hours you work by your hourly rate to find your gross pay. For example, if you work 35 hours a week and have a $25 hourly rate, your gross weekly pay would be $875. If you work 50 weeks out of the year, your gross annual income would be $43,750. 

And if you work contract jobs or set your own hourly rate, you can find your gross income by adding up everything you earned throughout the year. Keep in mind: Gross income should include your total yearly earnings, and there may have been other benefits you got during the year that are taxable to you. For example, if your employer paid you a holiday bonus, that amount would also be part of your gross pay.

Is gross income before or after taxes?

Gross income refers to your total earnings before taxes, employee benefit costs or other deductions are applied.

Net income—or net pay—is the amount of money you bring home after all taxes and deductions are subtracted. Your net income may depend on mandatory withholdings—like FICA taxes (also known as employment taxes)—and voluntary deductions like health care premiums.

Knowing which deductions and withholdings apply to your paycheck can help you determine your net income, also known as take-home pay. And having an idea of your take-home pay can help you manage your cash flow and create a budget.

Gross income is the amount someone is paid before deductions, such as Social Security taxes or contributions to retirement accounts. And net income is what’s left after those deductions.

Here’s a quick example calculation to help explain:

If Christy earns $60,000 per year, her gross income is $60,000. After her deductions and taxes are taken out, she may only take home $40,000. That $40,000 is her net income.

Once you know the differences between net income and gross income, it’s important to see how each can affect your budget. Your net income is probably the best number to use for a monthly budget.

Basing your budget on your gross income won’t give you an accurate picture of your take-home pay, because gross income is reduced by deductions. Remember: You won’t receive all of your gross income when you get paid.

Knowing the differences between gross and net income can help you better understand your financial situation. And finding your net income can help you budget your money better. 

Learn more about how to make the most of your budget and learn a few money management tips that might help you improve your finances.