Gross vs Net Income: The Difference Explained (with Calculator)

Open any job offer letter and you will see one big, attractive number near the top — the salary. That is gross income. Open your first paystub a few weeks later and you will see a smaller, less attractive number labeled "net pay." That is what actually hits your bank account. The gap between those two figures is where most people get blindsided when they budget. They sign a lease assuming the lease number, pick a car payment off the salary number, then run short the first month and wonder why. This guide explains gross vs net income in 30 seconds and then goes deeper than most articles do, walking through every line item that gets pulled out of a US paycheck in 2026 — federal tax, FICA, state tax, 401(k), and health insurance — with real numbers on an $80,000 salary. By the end you will be able to predict your own take-home within a few hundred dollars, which is the single most useful budgeting skill there is.

The 30-Second Definition

Gross income is what you earn before anything is taken out. Salary, hourly wages, bonuses, freelance fees, tips, side-gig revenue — all gross.

Net income is what's left after deductions. It is the dollars that show up in your account on payday. Net is sometimes called "take-home pay," and the two terms mean the same thing in everyday use.

The gap is created by mandatory taxes (federal income tax, FICA, sometimes state and local), plus voluntary or employer-required deductions (retirement contributions, health insurance premiums, HSA, FSA, commuter benefits). For a typical US W-2 employee earning $80,000, the gap runs about 22-30% depending on state and benefits — meaning your real cash income is closer to $56,000-$62,000.

That single fact reshapes how you should budget. Use net for monthly expenses (rent, groceries, payments). Use gross for retirement planning, debt-to-income ratios on loan applications (lenders evaluate gross), and tax planning. Mixing the two is the most common budgeting mistake, and it is the reason "I make $80k but I'm always broke" is such a familiar story. The ScoutMyTool take-home pay calculator lets you flip between the two with your own numbers in about 30 seconds.

What Actually Gets Deducted (US 2026 Edition)

Before we walk an example, here is the order of deductions on a typical W-2 paycheck and what each one actually is.

Pre-tax deductions come out first, lowering the income that gets taxed:

• Traditional 401(k) or 403(b) contributions. Up to $23,500 for 2026 if you are under 50, plus $7,500 catch-up if you are 50 or older, per the IRS retirement plan limits.
• Health insurance premiums. Most employers run these pre-tax via a Section 125 cafeteria plan.
• HSA contributions. Pre-tax for federal and most states. Limit for 2026 is around $4,300 single, $8,550 family.
• FSA contributions. Pre-tax, smaller annual cap.

Federal income tax is calculated on what's left. The 2026 brackets are progressive — your first dollars are taxed at 10%, the next chunk at 12%, then 22%, 24%, and up. A single filer at $80,000 sits in the 22% marginal bracket but pays an effective rate closer to 14-15% federal because most of the income is taxed at lower bracket rates. Run your specific numbers through a tax bracket calculator for an exact figure.

FICA is the combined Social Security + Medicare tax. It is flat and unavoidable for W-2 wages:

• Social Security: 6.2% on wages up to the 2026 wage base (around $176,100, per the SSA wage-base history)
• Medicare: 1.45% on all wages, plus an extra 0.9% over $200,000

For most workers, FICA totals exactly 7.65% of gross.

State income tax varies wildly. Nine states have no income tax (Texas, Florida, Tennessee, Nevada, Washington, Wyoming, South Dakota, Alaska, New Hampshire on wage income). California's top bracket is 13.3%. Most states run effective rates of 4-7% for middle incomes.

After-tax deductions come last and don't reduce taxable income — Roth 401(k) contributions, after-tax life insurance, garnishments, etc.

Worked Example: $80,000 Gross → Typical Net

Let's run the numbers on someone earning $80,000 in a state with a moderate income tax (say, around 5% effective). Single filer, contributing 6% to a traditional 401(k), paying $200/month for employer health insurance.

Here is the full breakdown for a calendar year:

A few things worth noting. FICA is calculated on gross before pre-tax retirement contributions but after pre-tax health premiums (cafeteria plan rules per IRS Publication 15-B). State tax rules vary — some states tax 401(k) contributions, most do not.

The headline: an $80,000 salary nets roughly $55,000 for this person. About $25,000 is "missing" from gross, but it is not gone — $4,800 is sitting in your retirement account, $2,400 went to health insurance you actually use, and the rest is taxes you owed anyway. Reframing the gap that way helps a lot. Pair this with a budget calculator using the net number to size rent, food, and discretionary spending realistically.

If you live in a no-income-tax state, your net jumps by roughly $3,640/year (the state tax line zeros out), bringing take-home closer to $58,580. If you live in California or New York City, expect the opposite — net drops by another $2,000-$4,000.

When to Use Gross, When to Use Net

Both numbers matter; they just answer different questions.

Use gross when:

• Applying for a mortgage or auto loan. Lenders calculate debt-to-income ratios using gross. The CFPB's qualified mortgage rule caps DTI around 43% of gross for most QM loans. Use a debt-to-income calculator before house shopping.
• Comparing job offers. Salary-to-salary comparisons require gross, because tax and benefits differ across employers.
• Planning retirement contributions, since limits are based on gross compensation.
• Calculating raises, bonuses, and percentage-based metrics.

Use net when:

• Building a monthly budget. Rent, groceries, utilities, payments — all paid out of net.
• Setting savings rates as a percentage of take-home.
• Deciding whether you can afford a recurring subscription or commitment.
• Comparing actual cash flow between two job offers in different states or with different benefits packages.

The most common failure is using gross to size monthly commitments. A $2,500 rent payment is fine on $80,000 gross — that's 37.5% — but it is 55% of net for the example above. The 30% rule of thumb everyone quotes refers to net for living expenses, not gross. Run your real number through the take-home pay calculator before signing anything with a monthly commitment longer than a year.

For the self-employed, the math gets messier. There is no employer payroll, so you pay both halves of FICA (15.3% combined, called self-employment tax), pay quarterly estimated taxes, and deduct expenses to arrive at "net business income" before any of the personal deductions above. Schedule SE and IRS Publication 334 walk through the details, and a 1099 worker's effective tax burden runs noticeably higher than a W-2 worker at the same gross.

Frequently Asked Questions

Is gross income before or after taxes? Before. Gross is the total earned. Net is what is left after taxes and other deductions are removed.

Does gross income include bonuses? Yes. Any compensation from your employer — base salary, bonuses, commissions, tips, taxable benefits — is part of gross income. Some bonuses are withheld at a flat 22% federal supplemental rate, which is why bonus paychecks can feel disappointingly small even though they are not taxed differently overall.

Why is my net pay different each pay period? Most often because of variable hours, changes in benefits, mid-year wage-base limits hitting (high earners stop paying Social Security past the cap), or supplemental income like bonuses being withheld at different rates. Pre-tax contributions can also change if you adjusted your 401(k) percentage.

Is a Roth 401(k) deducted from gross? A Roth 401(k) contribution is taken out of your paycheck but is not pre-tax. It reduces net pay but does not reduce taxable income, so it does not lower federal or state tax withholding. The trade-off is tax-free growth and tax-free withdrawals in retirement.

How do I calculate my net income from my salary? Subtract pre-tax benefits (401(k), health, HSA), then federal income tax, then 7.65% FICA, then state and local tax, then after-tax deductions. Or shortcut it with a take-home pay calculator.

Do I report gross or net on my taxes? You report gross wages on your tax return (Box 1 of your W-2 is taxable wages, which is gross minus pre-tax deductions). The IRS calculates tax on that figure. Net pay does not appear on the return — it is just the cash that hit your bank.

What is the difference between net income and net worth? Net income is per-period earnings after deductions (per paycheck, per month, per year). Net worth is a balance-sheet number — assets minus liabilities at a single point in time. Both matter; they answer different questions.

Wrapping Up

Gross is what you earn. Net is what you can actually spend. Mixing the two is how budgets quietly fall apart. Memorize roughly what your net is as a percentage of gross — for most W-2 workers it lands between 65% and 78% — and you will catch most planning errors before they happen. When precision matters, run the ScoutMyTool take-home pay calculator with your actual numbers and use the tax bracket calculator to sanity-check withholding. Five minutes of math now saves a year of "where did it all go" later.