Gross to net: how a paycheck is actually calculated

“Why is my take-home so much less than my salary?” is the most common payroll question there is, and the honest answer is that a paycheck is a small assembly line — gross pay in one end, a stack of specific, ordered subtractions, net pay out the other. Once you can see the line, the number stops being a mystery.

Step 1 — Gross pay

The starting point: hourly wages (including overtime at the correct regular rate), salary for the period, plus commissions, bonuses and other earnings.

Step 2 — Pre-tax deductions

Certain deductions come out before taxes and reduce the wages tax is calculated on — traditional 401(k), cafeteria-plan health premiums, HSA/FSA. This is why two people with the same salary can have different taxable wages. Crucially, not all pre-tax deductions reduce every tax: a 401(k) lowers income-tax wages but is still subject to FICA.

Step 3 — Taxes

Calculated on the now-reduced taxable wages: federal income tax (per the W-4), FICA (Social Security up to the wage base, and Medicare), and state and local income tax where they apply.

Step 4 — Post-tax deductions

Anything after taxes — Roth 401(k), garnishments, union dues, after-tax benefits — reduces the paycheck but not taxable wages.

Step 5 — Net pay

What’s left is take-home — the number that hits the bank.