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The gap between gross and net pay, explained.
You're about to make your first offer. You've settled on a weekly wage, but the number you commit to isn't the number your new employee will see on her first check.
That gap is the difference between gross pay and net pay. Gross pay is the amount you offer. Net pay is what your employee receives after required taxes and deductions.
What happens in between matters. You’re responsible for withholding federal, state, and local taxes based on Form W-4 information, current tax rules, and any benefit elections. Those calculations determine how you quote wages, what your employee expects on payday, and what your payroll costs.
That gap has real consequences. In the 2025 Getting Paid in America survey from PayrollOrg, nearly four in 10 U.S. workers said they aren’t fully confident their paychecks are calculated correctly. Getting gross and net pay right, and being able to explain the difference, helps set trust early.
An online payroll solution like SurePayroll® By Paychex can automate withholdings, apply current tax rules, and generate pay statements every pay period.
What Is Gross Pay?
Gross pay is the top-line number on every paycheck. It shows what your employee earned in the pay period before you apply payroll taxes and deductions.
Gross Pay for Hourly Workers
For hourly employees, you calculate gross pay by multiplying the wage rate by hours worked in the pay period, then adding any overtime, tips, commissions, or bonuses.
A stylist who works 38 hours at $22 an hour earns $836 in gross pay for the week. The same stylist in a 45-hour week earns $880 for 40 regular hours plus $165 for five overtime hours at time-and-a-half, for $1,045 in gross pay.
Gross Pay for Salaried Employees
For salaried employees, you calculate gross pay per pay period by dividing the annual salary by the number of pay periods in the year.
A $62,000 annual salary paid biweekly comes to $2,384.62 in gross pay per pay period. Bonuses, commissions, and other incentive pay add to that base.
Gross pay is the base figure. Every tax and benefit calculation starts from it, setting up the deductions that follow.
What Is Net Pay?
Net pay is the amount your employee receives. It's the money that goes into her bank account after you subtract federal, state, and local taxes and any voluntary deductions from gross pay.
From your side, net pay is what's left after the math you calculate every pay period. Get the withholding right and net pay is correct. Get it wrong and you own the correction.
If the stylist's gross pay for the week is $836, her net pay could be $680 after federal income tax withholding, Social Security and Medicare taxes, and any voluntary deductions. The exact amount depends on her Form W-4 elections and any benefits she's enrolled in.
What Turns Gross Pay into Net Pay: The Deductions Bridge
With every payroll process, you make two types of deductions on gross pay: mandatory and voluntary.
Federal, state, and (in some places) local law require mandatory deductions on every employee's paycheck. Voluntary deductions depend on which benefits you offer and which ones each employee signs up for. You calculate and withhold both every pay period.
Mandatory Deductions
Mandatory deductions are legal obligations. A business your size typically has two or three consistent line items:
- Federal income tax: Your employee's Form W-4 elections determine how much you withhold, following current IRS tables.
- FICA employee portion: 6.2% Social Security plus 1.45% Medicare, a flat 7.65% on gross pay. You match this separately as an employer cost.
- State and local income tax: Varies by state and locality. Nine states don't have income tax or don't tax wages. Certain cities, like New York City and Philadelphia, add local withholding.
For the stylist earning $836 gross, her FICA withholding is flat: $64. Her federal income tax withholding depends on her W-4; state and local tax depend on where she works.
Voluntary Deductions
Voluntary deductions depend on the benefits your employee elects. You set up the withholding once and apply it every pay period.
- Retirement contributions: 401(k) or other employer-sponsored retirement plans. Traditional (pre-tax) contributions reduce taxable wages; Roth contributions don't.
- Health insurance premiums: Typically pre-tax when you sponsor the plan; you deduct the employee's share from each paycheck.
- HSA or FSA contributions: Pre-tax deductions for medical or dependent care expenses through a qualifying plan.
A Note on Employer Taxes
Your employer tax obligations include the FICA taxes you match on your employee’s behalf (6.2% Social Security plus 1.45% Medicare), FUTA (federal unemployment insurance tax), and SUTA (your state’s unemployment tax). All three apply to gross pay but do not reduce it.
You pay these payroll taxes separately, not out of the employee's gross. For the full employer cost picture, including rates and deposit schedules, see our paycheck estimator article.
What Gross and Net Pay Mean for Hiring and Compliance
Gross and net pay are separate numbers connected by the deductions you make. The gap shows up in two places that matter immediately: what you offer a candidate and what the IRS expects you to withhold.
You Quote Wages Clearly
When a candidate asks what he'll take home, the best answer is that you commit to gross pay and you don't control what he nets. His W-4 elections and state taxes determine his net. You quote gross, you name the variables he controls, and you set a clear expectation before the candidate signs.
One thing to get right: never promise a specific net figure and then adjust gross to hit it. That locks you into recalculating every time a W-4, benefit enrollment, or tax rate changes.
Compliance Starts at the First Paycheck
Withholding the wrong amount, or withholding nothing, exposes your small business to back taxes, failure-to-deposit penalties, and in some cases, personal liability for the person responsible under the Trust Fund Recovery Penalty. You can avoid payroll penalties by paying careful attention to detail when you run payroll or by engaging a professional payroll service.
That exposure doesn’t shrink for first-time employers. The Federal Reserve’s 2025 Report on Non-employer Firms surveyed 5,955 solo-operator firms and found that 33% planned to add their first employee in the next 12 months.
The IRS applies the same withholding and deposit rules to the first paycheck you issue as it does to any established employer’s.
When you set up withholding correctly before the first pay period, you minimize that exposure. You run the math on each employee's W-4 using current IRS withholding tables.
A service like SurePayroll applies the current IRS withholding tables and calculates the income tax withholding amount on every payroll run.
Common Misconceptions About Gross and Net Pay
Gross pay is the total cost of hiring an employee.
False.
Gross pay is only the base figure. Your FICA match, FUTA, SUTA, and any benefits you sponsor add to what each hire costs you.
Net pay is calculated the same way for every employee.
False.
Federal income tax withholding depends on your employee's W-4 elections, and voluntary deductions differ by what each employee has elected. Two employees earning the same gross pay can net different amounts on the same pay period.
Annual salary equals taxable wages on a W-2.
False.
Pre-tax deductions, traditional 401(k) contributions, pre-tax health insurance premiums, and HSA contributions all reduce the taxable wages that show in Box 1 of the W-2. Annual gross pay and Box 1 taxable wages often aren't the same number.
Automate the Calculations from the First Paycheck
You commit to gross pay with every offer. Delivering your employees’ net pay correctly takes the right process across payroll taxes, withholdings, and benefit deductions on every paycheck.
SurePayroll automates the payroll calculations so each paycheck reflects current tax laws and every employee's elections.
SurePayroll applies each employee's W-4 elections, deducts voluntary benefits you've set up, and delivers net pay by direct deposit every pay period. The calculations run consistently every paycheck. SurePayroll keeps a record of every calculation for your files.
“SurePayroll has taken away the headache of calculating payroll taxes and filing quarterly taxes. It’s been such a relief knowing everything is handled accurately and on time, which saves me a ton of stress and frees me up to focus on running my business.” — Health, Wellness and Fitness customer, G2 review
Note on record keeping: Every payroll run generates records you’re required to retain. See how long to keep payroll records for the IRS requirements that apply to your business.
Ready to set up payroll for your first hire?
This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up to date
