What is Gross Pay and Net Pay?

Every pay stub shows two key figures. Gross pay is total earnings for the period: salary, hourly wages, overtime, commissions, bonuses and taxable fringe benefits. Net pay, or take-home pay, is what remains after withholding and deductions.

From gross to net

Typical deductions include:

1. Federal income tax withholding, based on the employee's Form W-4 and the IRS tables in Publication 15-T
2. Social Security and Medicare taxes; see FICA tax
3. State and local income taxes where applicable
4. Pre-tax deductions, such as retirement deferrals and certain health premiums
5. After-tax deductions, such as Roth deferrals or garnishments

Pre-tax vs after-tax

Pre-tax deductions reduce wages subject to income tax, and some also reduce wages subject to FICA. That is why W-2 box 1 often differs from box 3; see Forms W-2 and W-3.

Employer costs on top of gross pay

Gross pay is not the employer's total cost. Employers also pay their share of FICA, federal and state unemployment taxes, workers' compensation premiums and benefits. A loaded labor cost includes all of them.

In the books

Gross wages are recorded as wage expense. Withholdings and deductions are recorded as payroll liabilities until paid to the government or benefit providers. Net pay reduces cash. Recording only net pay as an expense is a common error that understates wages and leaves liabilities unrecorded.

See our guide to how to run payroll for the first time and the payroll register.

Related terms

• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
• FICA Tax: FICA tax is the Social Security and Medicare tax paid on wages, shared between employers and employees.
• Payroll Register: A payroll register is a report listing each employee's earnings, deductions and net pay for a payroll period.
• Fringe Benefits: Fringe benefits are forms of pay other than wages, such as health coverage, vehicles or discounts, which are taxable unless an exclusion applies.

Browse more definitions in the small business glossary.