Gross to net pay

Gross payPayrollGross payWhat an employee earned for the pay period before anything is withheld — salary, or hours times rate, plus overtime, bonuses and commissions. Payroll expense in the books is the gross, not what reached the bank is what an employee earned. Net payPayrollNet payGross pay less every withholding — income taxes, the employee's Social Security and Medicare, benefit deductions — and so what reaches the employee's bank. Always the remainder, never a separately computed figure is what reaches their bank, and the gap between them is money the employer withholds and owes to the government. On September 25, 2026 Northwind's two employees earned $8,400 and were paid $6,707.40. Here is where the other $1,692.60 went.

Federal income tax withholdingPayrollFederal income tax withholdingThe income tax an employer withholds from each paycheck, worked out from the employee's Form W-4 by a method in IRS Pub. 15-T — in an automated payroll, the percentage method and Worksheet 1A — and deposited with FICA is worked from each employee's Form W-4PayrollForm W-4The form a new employee gives the employer to set federal income tax withholding — filing status, the two-jobs checkbox, credits, other income, deductions and extra withholding. Kept by the employer, not sent to the IRS unless it asks. A state with an income tax may use its own certificate, such as California's DE 4 by a method in IRS Publication 15-T. An automated payroll uses the percentage method: annualize the period's wages, take off the W-4's adjustments, find the row in the year's table, compute a year's tax and divide it back to one period. Priya Shah checked the two-jobs box in Step 2, which switches to a table with narrower brackets and drops the standard adjustment, so she's withheld $917 on $5,775. Marcus Lee filled in Step 1 and nothing else: $8,600 comes off his annual wages first, and he's withheld $133. Northwind's provider rounds withholding to the whole dollar, which the IRS allows if it's done every time.

FICAPayrollFICASocial Security tax — 6.2% of wages up to the year's wage base — and Medicare tax — 1.45% of all wages — each paid twice: withheld from the employee and matched by the employer. 7.65% a side below the wage base is two taxes, each withheld from the employee and matched by the employer. Social Security is 6.2% of wages up to the Social Security wage baseTaxSocial Security wage baseThe maximum annual wages subject to the 6.2% Social Security tax, for employee and employer each — $184,500 in 2026, $176,100 in 2025, indexed every year. Medicare tax has no cap, $184,500 for 2026. Medicare is 1.45% of all wages, with no cap. Each tax is rounded on each paycheck: Priya Shah's Medicare is 5,775 × 1.45%, rounded once to $83.74. Together they took $642.60 from September's paychecks.

Above $200,000 of wages in a calendar year, the employer must also withhold the Additional Medicare TaxPayrollAdditional Medicare TaxA further 0.9% Medicare tax an employer must withhold on an employee's wages over $200,000 in a calendar year, from the pay period they pass it. Employee-only: there is no employer match, 0.9%, from the pay period the employee crosses it — whatever their filing status. There's no employer match on it.

A bonus or commission is a supplemental wagePayrollSupplemental wagesPay that isn't regular wages — bonuses, commissions, overtime, severance, back pay. Federal income tax on it may be withheld at a flat 22% for 2026, and must be at 37% on an employee's supplemental wages over $1 million in the year. Paid separately from the regular salary, its federal income tax can be withheld at a flat 22% instead of through the W-4 — and must be at 37% on the part of an employee's supplemental wages over $1,000,000 in the year. FICA applies to it as to any wage.

State and local income tax follow each state's own method and certificate. Some states also withhold for programs of their own: state disability insuranceTaxState disability insuranceA state program paying partial wages to employees off work with a non-work-related illness or injury, funded mainly by employee withholding — California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico and paid family and medical leaveTaxPaid family and medical leaveA state insurance program, funded by payroll contributions from employees, employers or both, that pays wage replacement during leave for a serious health condition, a new child or family care — in about a dozen states and DC, each with its own rate and wage base. Pre-tax benefits — health premiums under a cafeteria plan, traditional 401(k) deferrals — come out before some of these taxes and not others; the Health & benefits trackTrackHealth & benefitsGroup health plans, the ACA, COBRA, HSAs and FSAs, HRAs, retirement plans and their filings.10 lessons · 136 min works them through.

From October 1, 2026 both employees are on Northwind's health plan, and each pays $162.50 a month of the premium through a section 125 premium plan. A cafeteria-plan health premium is excluded from the wages income tax is withheld on, and from Social Security, Medicare and FUTA wages. So the salary doesn't change, but every tax is worked on the salary less the premium — and net pay is lower by the premium, less the tax it saves. The Health & benefits trackTrackHealth & benefitsGroup health plans, the ACA, COBRA, HSAs and FSAs, HRAs, retirement plans and their filings.10 lessons · 136 min sets the plan up; here is what it does to Priya Shah's paycheck.

Net pay is gross less a flat 7.65% and a guess for income tax.

Net pay is gross less each tax, each worked on its own base and rounded once: $4,416.21 for Priya and $2,291.19 for Marcus.

In this lesson: the W-4 worksheet, line by line, for both of Northwind's employees.