Gross to net pay in the United States: how it works
Reviewed by Mellow Editorial Team, HR & payroll content team
Gross pay is what you promise an employee; net pay is what lands in their bank account. The difference is made up of mandatory tax withholdings, statutory deductions, and any voluntary deductions the employee has authorized.
What counts as gross pay
Gross pay is the total compensation before any deductions. For a salaried employee it is their agreed annual salary divided by the number of pay periods. For an hourly worker it is hours worked multiplied by their hourly rate, plus any overtime.
Gross pay also includes bonuses, commissions, and taxable fringe benefits. All of these flow into the withholding calculations below.
Federal income tax withholding
Federal income tax is progressive, running in brackets from 10% to 37%. You do not choose the rate — the employee's Form W-4 tells you how to calculate it.
The W-4 captures filing status (single, married filing jointly, head of household), any additional income the employee wants factored in, and any extra flat-dollar withholding they request. You feed that information into the IRS Publication 15-T wage bracket or percentage method tables to arrive at the dollar amount to withhold from each paycheck.
If an employee updates their W-4 mid-year, apply the new instructions from the next payroll run onward.
FICA: Social Security and Medicare
FICA contributions are separate from income tax and follow fixed rates.
Social Security: The employee pays 6.2% of gross wages up to the annual wage base. Earnings above that threshold are not subject to Social Security tax. You, the employer, match that 6.2% from your own funds — it does not come out of the employee's gross pay.
Medicare: The employee pays 1.45% with no earnings cap. Again, you match 1.45%.
Additional Medicare Tax: High earners pay an extra 0.9% on wages above a threshold that depends on filing status. You withhold this surcharge from the employee's wages but you do not match it — the additional 0.9% is entirely the employee's obligation.
A practical note: you are responsible for depositing both the employee-side withholdings and the employer-side FICA match. Running those numbers correctly on every payroll run is non-negotiable.
State income tax and other state deductions
State income tax varies widely. Texas, Florida, and Washington, for example, have no state income tax, which simplifies the gross-to-net calculation considerably. Most other states have their own progressive or flat-rate income tax that you must withhold according to that state's tables and the employee's state withholding certificate.
Beyond income tax, some states require withholding for:
- State Disability Insurance (SDI) — California and New York both have employee-funded SDI programs.
- Paid Family and Medical Leave (PFML) — Several states, including Washington and Massachusetts, fund these programs through payroll deductions.
- Local income taxes — Cities such as New York City and Philadelphia levy their own income taxes on top of state tax.
Whenever you hire someone, identify every jurisdiction where the work is performed — not just where the company is headquartered — and set up withholding accordingly.
Voluntary deductions
After mandatory withholdings, employees can authorize deductions for:
- Retirement contributions (401(k), 403(b)) — pre-tax contributions reduce federal taxable income, which lowers income tax withholding.
- Health, dental, and vision insurance premiums — if the plan is set up under a Section 125 cafeteria plan, employee premiums are pre-tax, again reducing the taxable wage base.
- Health Savings Account (HSA) or Flexible Spending Account (FSA) contributions.
- Post-tax deductions such as Roth 401(k) contributions, garnishments, or voluntary supplemental insurance.
The order in which you apply deductions matters. Pre-tax deductions reduce the gross amount subject to federal income tax and, depending on the plan, FICA as well. Post-tax deductions come out after all taxes have been calculated.
Reporting and remitting what you withhold
Collecting the right amounts is only half the job. You must also:
- Deposit withheld taxes on the IRS schedule that applies to your deposit frequency (monthly or semi-weekly, based on your lookback period).
- File Form 941 each quarter, reporting wages paid, income tax withheld, and FICA contributions for the quarter.
- Issue Form W-2 to every employee — and file copies with the Social Security Administration — by January 31 each year.
- Issue Form 1099-NEC by January 31 for any independent contractor paid $600 or more during the tax year.
Missing deposit deadlines or filing late triggers penalties that compound quickly. If you run payroll across multiple states, how Mellow runs payroll across six countries on one platform illustrates why centralized calculation and remittance tracking matters at scale.
Getting the gross-to-net calculation right requires applying deductions in the correct sequence, using current withholding tables, and staying on top of state-level obligations that vary by where your employees actually work.
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