Understanding Your Paycheck: From Gross to Net Pay

What's the difference between gross and net pay?

Gross pay is what you earn before anything comes out. Net pay (your take-home pay) is what actually lands in your bank account. The difference is taxes and deductions: federal income tax, Social Security, Medicare, usually state income tax, and anything you've signed up for, like a 401(k) or health insurance. In the example below, a $2,307.69 paycheck brings home $1,670.41, about 72% of it.

Maybe you've had this moment: you start a new job, your first paycheck lands in your account, and it's a lot smaller than you expected. Nothing went wrong, and none of that money disappeared. It just went through a few filters on the way to you, and once you can see them, your pay stub starts to make a lot more sense.

Picture water running through filters

In the cash flow post, your paycheck is the faucet filling your bathtub. But the water doesn't start at the faucet. It starts at the water main, and on the way to your tub it runs through a row of filters:

• The water main is your gross pay: your salary or hourly wages, before anything comes out.
• The filters each take some water out of the pipe. Some send it to the government (taxes). Some send it to your own tanks (a 401(k) or a health savings account), so that water isn't gone, just stored somewhere else for later.
• The faucet is your net pay: whatever makes it through all the filters and into your tub.

Two things about the filters matter more than anything else: what each one takes, and what order they're in.

A paycheck, filter by filter

Say you earn $60,000 a year, paid every two weeks, so 26 paychecks of $2,307.69 each. You put 5% into a traditional 401(k), your share of your employer's health insurance is $75 a paycheck, and your state has a 5% income tax. Here's how the water gets filtered for a single filer, using 2026 federal figures:

Filter	Takes out	Where the water goes
Traditional 401(k), 5%	$115.38	Your own retirement tank
Health insurance	$75.00	Your health coverage
Social Security, 6.2%	$138.43	Social Security
Medicare, 1.45%	$32.37	Medicare
Federal income tax	$170.23	The federal government
State income tax, 5%	$105.87	Your state
Net pay (your faucet)	$1,670.41	Your bank account

Out of $2,307.69, $1,670.41 reaches the faucet, about 72%, or about $43,430 over the year. Of the $637.28 that didn't:

• $115.38 went into your own 401(k), where it can snowball for decades.
• $75 paid for your health insurance.
• $446.90 went to taxes.

The state tax is a made-up flat 5% to show the pattern. Real states have their own rules, and a few have no income tax at all: without the state filter, this paycheck would bring home $1,776.28. The math is also simplified: each tax is figured for the whole year and split evenly across paychecks, so a real pay stub may differ a little.

Why does the order of the filters matter?

Some filters sit before the tax filters, so the water they take out never gets taxed. These are pre-tax deductions.

• A traditional 401(k) comes out before income tax, but not before Social Security and Medicare.
• Health insurance through your employer usually comes out before all of them: income tax, Social Security, and Medicare.

Because those filters come first, they cost you less than they take out. In the example:

• The $115.38 going into the 401(k) only shrinks your take-home pay by about $95.77, because it skips the 12% federal bracket and the 5% state tax you'd otherwise pay on it. (That's your marginal rate at work; see your top bucket and your 401(k) for more.)
• The $75 for health insurance only shrinks it by about $56.51, because it skips income tax and Social Security and Medicare.

After-tax deductions sit after the tax filters, so they don't lower your taxes: a Roth 401(k), for example, or some kinds of insurance. They still come out before the faucet.

How each tax filter works

• Social Security is 6.2% of your pay, up to a yearly limit that rises most years; the Social Security Administration (opens in a new tab) lists the current one. Once your pay for the year passes it, Social Security stops coming out until January. Your employer pays another 6.2% on top.
• Medicare is 1.45% of all your pay, with no limit. Your employer also withholds an extra 0.9% on pay over $200,000 in a year, according to the IRS (opens in a new tab), and pays its own 1.45%. Together, Social Security and Medicare are often called FICA on pay stubs.
• Federal income tax depends on your taxable income: your pay after pre-tax deductions, minus the standard deduction. In the example, that's $60,000 − $3,000 (401(k)) − $1,950 (insurance) = $55,050, minus the 2026 standard deduction of $16,100, for $38,950 of taxable income. The tax brackets put that at $4,426 of tax for the year, or $170.23 a paycheck.
• State income tax depends on your state: most have one, a few don't, and the rates and rules vary.

The numbers in these filters change most years (the brackets, the standard deduction, the Social Security limit, how much you can put in a 401(k)). The paycheck calculator always uses the current year's, and the tax bracket calculators show this year's brackets.

Try your own numbers

The calculator starts on the example above. Change the salary, how often you're paid, your 401(k) percent, your insurance, or the state tax rate, and watch each filter change. This one uses 2026 figures so it keeps matching the example; the paycheck calculator uses this year's.

How to read your pay stub

Pay stubs use a lot of abbreviations, but they follow the same path as the water. Here's what you'll usually see, in roughly this order:

On your stub	What it means	Filter
Gross pay, Earnings	Everything you earned this pay period	The water main
401(k), Medical, Dental, Vision, HSA, FSA	Pre-tax deductions	Before the tax filters
Federal income tax, FIT, FED WH	Federal income tax withheld	Tax filter
Social Security, OASDI, SS	Social Security tax (6.2%)	Tax filter
Medicare, MED	Medicare tax (1.45%)	Tax filter
State tax, SIT	State income tax, if your state has one	Tax filter
Roth 401(k), after-tax deductions	Deductions after taxes	After the tax filters
Net pay	What's deposited in your account	The faucet
YTD	"Year to date": the total so far this year

The YTD column is worth a look once in a while. It shows how much has gone to each filter so far this year, which is a lot easier to grasp than one paycheck at a time.

Paid every two weeks? Watch for the third paycheck

If you're paid every two weeks, you get 26 paychecks a year, not 24. Most months have two paydays, but two months a year have three. If you build your monthly budget on two paychecks, those extra paychecks are a built-in chance to top up an emergency fund or pay down a balance, instead of disappearing into everyday spending.

Is a big tax refund a good thing?

Withholding is an estimate. Your employer guesses how much income tax you'll owe for the year, based on your W-4, and takes a slice out of each paycheck. When you file your tax return, the real number gets figured out:

• Too much was withheld: you get the difference back as a refund.
• Too little: you owe the difference.

A refund feels like a bonus, but it's your own water, held back all year and returned without interest. A smaller refund means a little more reaches your faucet every paycheck instead, where it can go toward an emergency fund or start compounding sooner. A refund near zero means your withholding was about right.

If your refund or bill is big, the IRS's Tax Withholding Estimator (opens in a new tab) can help you adjust your W-4. This is educational, not tax advice; for anything complicated, consider talking with a tax professional.

Why your take-home pay is the number to plan with

Your budget runs on what comes out of the faucet, not what leaves the water main. A $60,000 salary isn't $5,000 a month to spend; in the example, it's about $1,670 every two weeks. That's the number to use for the income side of your cash flow.

It also helps with raises. When your pay goes up, the filters take their share of the new water too, so a $1,000 raise won't add $1,000 to your take-home pay. But it always adds something: only the new dollars pay the higher rate, as the raise example in the tax brackets post shows.

What to take with you

• Gross pay is what you earn; net pay is what you keep. Plan your budget around net pay.
• Pull up your last pay stub and find each filter: pre-tax deductions, federal tax, Social Security, Medicare, state tax, and net pay.
• Check the order. Pre-tax deductions like a traditional 401(k) and employer health insurance lower your taxes, so they cost less than they take out.
• Look at your last tax refund. If it was big, adjusting your W-4 could put that money in your hands all year instead.
• Follow your own tanks. Money going into a 401(k) or HSA isn't lost; it's yours, saved for later.

Want to see your own paycheck? Try the paycheck calculator, or read how tax brackets actually work to see how the income tax filter is figured.