Gross vs. Net Pay: How to Read Your Paycheck

The short answer: gross is the offer, net is what lands#

Here is the gap that surprises every first paycheck: your gross pay is the salary you were promised, but your net pay — your take-home — is what actually reaches your bank account after deductions. Between the two sits a stack of taxes and contributions that come out automatically, before you ever see the money. On a typical US paycheck, that gap swallows somewhere between a fifth and a third of the total.

None of it is a mystery once you can read a pay stub. The deductions fall into a few clear buckets: FICA taxes for Social Security and Medicare, federal and state income tax withholding, and any pre-tax items you signed up for, like a retirement contribution or health premium. Each has its own logic, and each is listed as a line on your stub.

This guide breaks down exactly what leaves your paycheck and why, walks through a real example from gross to net, and shows how the same idea works on a Canadian pay stub. One note: this is general education, not tax advice, and the exact rates and caps shift a little each year — always check your own stub against the current figures.

• Gross is the sticker price — net is what actually lands.
• FICA is automatic — Social Security and Medicare come out of every cheque.
• Pre-tax deductions shrink your taxable pay — lowering the tax you owe.
• Take-home varies — by bracket, by state, and by your benefit choices.

What comes out of your paycheck#

Read any US pay stub and the deductions line up in the same order. First come the payroll taxes — FICA — which fund Social Security and Medicare and are not optional. Then income-tax withholding: an estimate of your federal (and, in most states, state) income tax, sent to the government on your behalf so you do not face one giant bill in April. Finally, any voluntary deductions you elected, such as a 401(k) contribution or your share of health insurance.

The order matters because some deductions come out before income tax is calculated and some after. Pre-tax items lower the income your withholding is based on; after-tax items do not. The reference overview at Wikipedia’s payroll-tax entry explains the categories, and the IRS page on Social Security and Medicare rates lays out the exact percentages. Once you know which bucket each line belongs to, a pay stub stops being a wall of numbers.

FICA: Social Security and Medicare#

The one deduction every US employee sees is FICA. It has two parts: Social Security at 6.2% of your wages up to an annual cap — $184,500 in 2026 — and Medicare at 1.45% of all your wages with no cap. Together that is 7.65% off the top for most people, and higher earners pay an extra 0.9% Medicare surtax on wages above a threshold.

What many workers do not realise is that your employer quietly matches your FICA, paying another 7.65% that never appears on your stub. So the government actually collects over 15% of your wages for these programs — half visible to you, half hidden in the cost of employing you. That hidden employer share is a theme that returns in every country, in different forms.

Income tax withholding#

The next big bite is income-tax withholding. Your employer estimates the federal income tax you will owe — based on the Form W-4 you filled out and the tax brackets — and sends it in from each paycheck. Most states add their own withholding on top, though a handful of states levy no income tax at all, which is why identical salaries take home different amounts in different states.

Because it follows the brackets, only part of your pay is taxed at your top rate — the same marginal logic explained in how tax brackets work. Withholding is only an estimate: if too much comes out across the year you get a refund, and if too little, you owe the difference. Adjusting your W-4 is how you fine-tune that balance so your take-home matches reality.

Pre-tax deductions lower the bite#

Here is where you have real control. Pre-tax deductions come out of your gross pay *before* income tax is calculated, so they shrink the amount you are taxed on. Contributions to a traditional 401(k), your share of employer health-insurance premiums, and money put into an HSA or FSA all work this way. Put $200 into a pre-tax 401(k) and your income-taxable pay drops by $200 — you are taxed as if you earned that much less. One nuance worth knowing: a traditional 401(k) still owes FICA, so it cuts your income tax but not your Social Security and Medicare, whereas health premiums and HSA money escape both.

This is why retirement contributions are doubly powerful: the money grows for your future *and* cuts your tax bill today, at your marginal rate. The accounts worth using are covered in the best retirement accounts, and the broader strategy in how to reduce your taxes. If your take-home feels tight, understanding which deductions are pre-tax is the first place to look.

From gross to net: a worked example#

Put it together. Say your gross pay for a period is $4,000. FICA takes 7.65%, or about $306. You contribute 5% to a pre-tax 401(k), $200, which lowers the pay your income tax is figured on. Federal and state withholding might come to roughly $500 combined, depending on your W-4 and state. Add it up and your net pay lands somewhere around $3,000 — about 75% of gross.

That 75% is only an illustration; your real percentage depends on your bracket, your state, and your benefit elections. But the shape is always the same: gross, minus payroll taxes, minus income-tax withholding, minus voluntary deductions, equals the number that hits your account. Knowing the shape is what lets you budget from your true take-home, using a framework like the 50/30/20 budget, rather than the bigger gross figure.

Bonuses and overtime are taxed too#

One more thing catches people out: a bonus is not a tax-free gift, even when it lands smaller than expected. Employers often withhold bonuses and other supplemental pay at a flat rate that can be higher than your normal withholding, so a big bonus can look heavily taxed on the stub. It evens out at tax time — a bonus is simply ordinary income — but the upfront bite can sting if you were expecting the full amount.

Overtime falls for the same myth. The extra hours are taxed as ordinary wages, not at a penalty rate, despite the persistent belief that "overtime is taxed more." What actually happens is that a bigger cheque pushes more of your pay through the progressive brackets that week, so proportionally more is withheld — but there is no special overtime tax. When the year is reconciled, it is all just income, and only your real annual total decides what you owe.

Why your take-home percentage moves#

Two people with the same gross salary can take home noticeably different amounts, and it is not random. A higher earner loses a bigger share to the progressive brackets. Someone in a no-income-tax state keeps more than an identical worker in a high-tax one. And anyone contributing heavily to pre-tax benefits shows a smaller net today while quietly building assets and cutting tax.

This is why "what do you make?" is a fuzzy question. The gross number is comparable across jobs, but the net depends on where you live and how you have set up your deductions. When you compare two offers, or plan a move, it is the take-home — not the headline salary — that actually changes your life.

For Canadians: CPP, EI and the pay stub#

A Canadian pay stub follows the same logic with different labels. Instead of FICA, employees pay into the Canada Pension Plan (CPP) and Employment Insurance (EI), each a percentage of earnings up to an annual maximum. On top of that comes federal and provincial income tax withholding — Canada, like the US, stacks two layers of income tax, so your province matters.

As in the US, your employer contributes its own share of CPP and EI that never shows on your stub, so the true cost of your employment is higher than your gross. The Canada Revenue Agency’s payroll deductions guidance sets out the current rates and maximums. The bottom line is identical on both sides of the border: your take-home is your gross minus mandatory contributions, minus income tax, minus whatever you elected.

What to check on your pay stub#

Reading your stub once, carefully, is worth it. These are the lines that matter, and the ones where errors quietly cost you money.

• Gross vs. net — confirm the top and bottom numbers make sense together.
• FICA / CPP + EI — the mandatory payroll contributions.
• Federal and state or provincial tax — your income-tax withholding.
• Pre-tax deductions — retirement and health, lowering your taxable pay.
• Year-to-date totals — useful at tax time and for spotting mistakes.
• Hours and rate — that the pay actually matches what you worked.

The bottom line#

Your salary and your take-home are two different numbers, and the distance between them is not a mystery — it is FICA, income-tax withholding, and the deductions you chose, each printed on your stub. Learn to read those lines and the paycheck stops being a black box: you can see exactly where your money goes before it ever reaches you.

So budget from your net, not your gross; use pre-tax accounts to keep more of what you earn; and glance at your stub now and then to catch errors early. The headline salary is what you negotiate, but the take-home is what you live on — and understanding the gap between them is one of the most useful money skills there is.