Gross vs. net pay, explained

Every paycheck carries two numbers, and mixing them up leads to some very confusing budgeting. Here's the difference, in plain language.

Gross pay is the sticker price

Gross pay is the full amount your employer agrees to pay you, before anything is taken out. If a job posting says “$70,000/year,” that's gross pay. It's also the number used on offer letters, loan applications, and most salary comparisons — which is exactly why it's easy to mistake for what actually shows up in your bank account.

Net pay is what you actually take home

Net pay — also called take-home pay — is what's left after every mandatory deduction comes out: federal income tax, state or provincial income tax, and payroll contributions like Social Security and Medicare in the US, or CPP/QPP and EI/QPIP in Canada. This is the number that has to cover rent, groceries, and everything else.

What sits between the two

The gap between gross and net is rarely one deduction — it's a stack of them. In the US, that stack is typically federal income tax, state income tax (in most states), Social Security (6.2% up to an annual wage base), and Medicare (1.45%, plus an extra 0.9% at high incomes). In Canada, it's federal tax, provincial or territorial tax, CPP or QPP, and EI or QPIP, with Ontario adding a surtax and health premium on top.

Voluntary deductions — 401(k)/RRSP contributions, health insurance premiums, HSA contributions — also come out of gross pay, but they're your choice, not a tax. Pre-tax contributions can even lower the income your tax is calculated on, which is part of why two people with the same salary can have different effective tax rates.

Why the gap varies so much by location

The same gross salary produces very different net pay depending on where you live. A $70,000 salary in Texas (no state income tax) nets more than the same $70,000 in California (up to 13.3% state tax) or Ontario (provincial tax plus surtax and health premium). This is exactly why a single national average doesn't tell you much — you need your specific state or province to get a real number.

Quick answers

Is gross pay before or after taxes?

Gross pay is before any taxes or deductions — it's the full agreed salary or wage.

Which number should I use to budget?

Always budget from net pay. Gross pay tells you what you're paid; net pay tells you what you actually have to spend.

Does gross pay include bonuses and overtime?

Yes — gross pay is the total of all earnings for the period, including base salary, overtime, bonuses, and commissions, before deductions.

Why is my net pay different every paycheck even though my salary is fixed?

Common causes include bonus/overtime pay in that period, changes to benefits elections, hitting an annual contribution cap (like the Social Security wage base), or a change in tax withholding.