What is net pay

Net pay—sometimes referred to as net income—is an employee’s gross earnings minus all payroll deductions and required withholdings.

In other words, net pay is the total amount deposited into a worker’s bank account each pay period. It represents the portion of compensation employees earn after income taxes, benefits, and other obligations are removed.

Why net pay matters

Net pay determines an employee’s real spending power and ability to budget. Employers rely on accurate gross-to-net calculations to ensure compliance with federal, state, and local taxes, withholding rules, and benefit deductions.

Understanding the difference between gross pay vs net pay—and the factors that affect net pay—helps both employees and payroll teams stay aligned on compensation accuracy.

Net pay vs. gross pay

• Gross pay is an employee’s gross income before any deductions: wages, salary, commissions, bonuses, overtime, and other taxable earnings

• Net pay is gross pay minus all mandatory and voluntary deductions

To understand the difference, it’s essential to know how to calculate gross pay and how to calculate net pay—two related but distinct payroll steps.

Common payroll deductions that reduce net pay

Net pay is determined by subtracting all required and elective deductions from gross earnings. These payroll deductions fall into two buckets:

1. Mandatory deductions

• Federal income tax

• Income taxes at the state and local level

• Tax contributions such as Social Security and Medicare (FICA) in the US

• Court-ordered garnishments

These legally required deductions vary by jurisdiction and by the employee’s tax rates.

2. Voluntary deductions (pre- and post-tax)

• Health insurance premiums

• Retirement plans (401(k), pension contributions)

• Union dues

• HSA/FSA accounts

• Life, dental, and vision insurance

• Charitable contributions

These elections can significantly affect net pay, especially when multiple benefits are selected.

How to calculate net pay (step-by-step)

The formula for calculating net pay is:

Gross pay − Taxes − All other deductions = Net pay

Step-by-step guide on how to find net pay

1. Calculate gross pay for the pay period: For salaried workers: annual salary ÷ number of pay periods. For hourly workers: hourly rate × hours worked

2. Subtract any pre-tax deductions

3. Apply federal state and local taxes

4. Subtract FICA (Social Security and Medicare)

5. Subtract post-tax deductions (Roth retirement, garnishments, etc.)

The result is your take-home pay.

Example calculations

Example 1 — Salaried employee

• Annual salary: $60,000

• Pay frequency: Bi-weekly (26 periods)

• Gross per period: $60,000 ÷ 26 = $2,307.69

• Total taxes + deductions: $700

Net pay = $2,307.69 − $700 = $1,607.69

Example 2 — Hourly employee with overtime

• Hourly rate: $20

• Hours worked: 45 (5 hours of overtime at 1.5×)

Gross pay:

• Regular: 40 × $20 = $800

• Overtime: 5 × $30 = $150

• Total gross = $950

If taxes + deductions = $230, net pay = $950 − $230 = $720

Example 3 — Supplemental pay (bonuses)

Bonuses and supplemental wages are taxable. Employers may withhold:

• A flat supplemental rate, or

• The aggregate method (adding a bonus to regular wages to calculate withholding)

Because supplemental withholding may be higher, net bonus pay is often lower than expected.

See also: A Complete Guide to Supplemental Tax Rates by State (2025)

US-specific payroll considerations

To calculate net pay correctly in the US, employers must apply:

• Federal income tax withholding (based on the employee’s W-4)

• State and local income taxes (when applicable)

• FICA tax contributions:

  • Social Security: 6.2%

  • Medicare: 1.45% (+0.9% additional tax for high earners)

These deductions apply every pay period and vary depending on earnings, tax rates, withholding elections, and benefit participation.

Pre-tax vs. post-tax deductions

Pre-tax deductions—such as health insurance, retirement plans, and commuter benefits—lower taxable income before taxes are applied and typically increase net pay.

Post-tax deductions (Roth contributions, garnishments, after-tax benefits) reduce pay after taxes have been assessed.

Both types directly affect net pay each pay period.

Why net pay may change month to month

Your net pay may vary because of:

• Overtime or varying hours

• Bonuses, commissions, or tips

• Updates to tax rates or withholding

• Enrollment changes in retirement plans or health insurance

• New union dues, advances, or benefit adjustments

Any change to earnings or payroll deductions can impact the final take-home amount.

How employers process deductions

Each pay run, employers:

• Calculate gross-to-net

• Withhold and remit taxes

• Apply benefit premiums and voluntary deductions

• Process garnishments

• Issue pay stubs detailing gross pay, itemized deductions, employer taxes, and net pay

For distributed or multi-state teams, automated payroll platforms like Deel help ensure compliance across jurisdictions.

How to simplify net pay calculations

With Deel Payroll, you can run payroll your way, locally or globally. Whether you run payroll yourself or prefer guidance from Deel’s experts, both options live on the same Deel Payroll platform.

With Deel’s real-time payroll engine, you get instant gross-to-net calculations in 50+ countries (and expanding fast).

Explore the benefits of Deel Payroll to learn more.

Frequently asked questions about net pay

How do I calculate net pay from gross pay?

Use: Net pay = Gross pay − (federal income tax + state and local income taxes + FICA + benefits + garnishments). Start by determining gross earnings for the pay period, then subtract all applicable payroll deductions.

How does health insurance affect net pay?

Premiums for employer-sponsored health insurance are typically pre-tax, which reduces taxable income and may increase net pay.

What deductions affect net pay the most?

Major factors include tax rates, retirement plans, health insurance, and union dues.

How do wage garnishments affect net pay?

Garnishments are taken after taxes and reduce net pay. Limits vary by jurisdiction.

Why is my take-home pay different each paycheck?

Changes in hours, overtime, bonuses, benefits, tax withholding, and other deductions can all affect net pay.