Gross versus net pay, and where the difference goes

4 min read

A $60,000 salary is $5,000 a month on paper and rather less in the account. The gap is not mysterious; it is four or five specific line items, in a specific order.

Start with gross

Gross pay is everything earned in the period before anything is removed: regular hours, overtime, bonus, commission, tips. For a salaried worker it is the annual figure divided by the number of pay periods — 26 for bi-weekly, 24 for semi-monthly, and those are not the same thing.

Subtract pre-tax items

Health insurance premiums, HSA and FSA contributions, and traditional retirement deferrals come out first. This is the good kind of deduction: a $200 pre-tax contribution costs you less than $200 of net pay, because the tax that would have applied to it never accrues.

Then the taxes

Federal income tax is progressive and depends on your W-4, so two people with identical pay can be withheld differently. FICA is flat: 6.2% for Social Security up to the annual wage base, 1.45% for Medicare with no ceiling. State income tax applies in most states, and some cities add their own.

Then post-tax items

Roth contributions, union dues, garnishments and repayments come out of already-taxed money.

A worked example

Take $2,451 gross for a bi-weekly period — 80 hours at $28.50 plus four overtime hours. No pre-tax deductions, single filer, no state income tax. Federal withholding runs roughly $200, Social Security about $152, Medicare about $36. Net lands near $2,062, or about 84% of gross. Add a state at 5% and it drops closer to $1,940.

The ratio is what matters for budgeting. Most single filers without pre-tax benefits keep somewhere between 70% and 85% of gross, depending mainly on the state. If your ratio sits far outside that, check your W-4 — you may be over-withholding and lending the government money at no interest.