# Gross to net pay

> $8,400 earned, $6,707.40 paid: federal income tax from each W-4, Social Security and Medicare on their own bases, and net pay as the remainder.

Source: https://lopifi.com/learn/gross-to-net-pay
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

---

**How do you calculate net pay from gross pay?** $8,400 earned, $6,707.40 paid: federal income tax from each W-4, Social Security and Medicare on their own bases, and net pay as the remainder.

[Gross pay](https://lopifi.com/md/glossary/gross-pay) is what an employee earned. [Net pay](https://lopifi.com/md/glossary/net-pay) 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.

Gross pay (Salary, hours, overtime, bonus) → Federal income tax (From the W-4, by Pub. 15-T) → Social Security (6.2% up to the wage base) → Medicare (1.45%, plus 0.9% over $200,000) → State and local (Where the state has them) → Net pay (What reaches the bank)

One paycheck, gross to net. State and local taxes and benefit deductions sit in the same chain where they apply.

| Employee | Gross | Federal income tax | Social Security | Medicare | Net pay |
| --- | --- | --- | --- | --- | --- |
| Priya Shah | 5,775 | 917 | 358.05 | 83.74 | 4,416.21 |
| Marcus Lee | 2,625 | 133 | 162.75 | 38.06 | 2,291.19 |
| Total | 8,400 | 1,050 | 520.80 | 121.80 | 6,707.40 |

Northwind's [payroll register](https://lopifi.com/md/glossary/payroll-register) for September 25, 2026. Every figure is computed from the salaries and the W-4s.

## Federal income tax, from the W-4

[Federal income tax withholding](https://lopifi.com/md/glossary/federal-income-tax-withholding) is worked from each employee's [Form W-4](https://lopifi.com/md/glossary/form-w-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.

> “You may also round the tax for the pay period to the nearest dollar. If rounding is used, it must be used consistently.”

— [IRS Pub. 15-T (2026), Introduction — Rounding](https://www.irs.gov/pub/irs-pdf/p15t.pdf) (PDF), Federal income tax withholding methods — Worksheet 1A and the 2026 percentage method tables

## Social Security and Medicare

[FICA](https://lopifi.com/md/glossary/fica) 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 base](https://lopifi.com/md/glossary/social-security-wage-base), $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.

> “The rate of social security tax on taxable wages is 6.2% each for the employer and employee. The social security wage base limit is $184,500. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2025. There is no wage base limit for Medicare tax.”

— [IRS Pub. 15 (2026), What's New](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), Social Security and Medicare tax for 2026

Above $200,000 of wages in a calendar year, the employer must also withhold the [Additional Medicare Tax](https://lopifi.com/md/glossary/additional-medicare-tax), 0.9%, from the pay period the employee crosses it — whatever their filing status. There's no employer match on it.

> “In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. … Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax.”

— [IRS Pub. 15 (2026), §9](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), Additional Medicare Tax withholding

| Month | Year-to-date wages before | Social Security | Additional Medicare |
| --- | --- | --- | --- |
| Month 9 | 160,000 | 1,240 | 0 |
| Month 10 | 180,000 | 279 | 0 |
| Month 11 | 200,000 | 0 | 180 |
| Month 12 | 220,000 | 0 | 180 |

A hypothetical engineer paid $20,000 a month in 2026. Not Northwind's.

**Example — Where the caps cut in.** The engineer's Social Security is $1,240 a month until month 10, when only $4,500 of the month's pay is still under the wage base. From then on there's none, so the December paycheck is bigger than the January one. Additional Medicare starts in month 11, the first month past $200,000. The year's Social Security comes to $11,439: 6.2% of the wage base, to the cent.

*[Figure: payroll withholding]*

Priya Shah's September paycheck. Federal tax is drawn as one flat rate equal to her Pub. 15-T withholding; no state tax is shown.

## Bonuses, and the state

A bonus or commission is a [supplemental wage](https://lopifi.com/md/glossary/supplemental-wages). 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.

> “The withholding rate on supplemental wages remains 22% (37% if supplemental wages paid to an employee during the calendar year exceed $1 million)”

— [IRS Pub. 15 (2026), What's New](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), Withholding on supplemental wages — bonuses and commissions

State and local income tax follow each state's own method and certificate. Some states also withhold for programs of their own: [state disability insurance](https://lopifi.com/md/glossary/state-disability-insurance) and [paid family and medical leave](https://lopifi.com/md/glossary/paid-family-and-medical-leave). 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 track](https://lopifi.com/md/learn/benefits) works them through.

## October: a premium taken out before tax

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 track](https://lopifi.com/md/learn/benefits) sets the plan up; here is what it does to Priya Shah's paycheck.

> “A cafeteria plan, including an FSA, provides participants an opportunity to receive qualified benefits on a pre-tax basis.”

— [IRS Pub. 15-B (2026), §1 Cafeteria Plans; §2 Table 2-1](https://www.irs.gov/pub/irs-pdf/p15b.pdf) (PDF), Employer's Tax Guide to Fringe Benefits

|  | September | October |
| --- | --- | --- |
| Gross pay | 5,775 | 5,775 |
| Health premium, pre-tax (§125) | 0 | 162.50 |
| Wages for income tax and FICA | 5,775 | 5,612.50 |
| Federal income tax | 917 | 878 |
| Social Security | 358.05 | 347.98 |
| Medicare | 83.74 | 81.38 |
| Net pay | 4,416.21 | 4,305.14 |

Priya Shah, September and October. The premium comes off before any tax is worked.

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

**Right:** 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.

Each tax has its own base. Income tax follows the W-4, Social Security stops at the wage base, Medicare doesn't.

**Exercise — Gross to net.** Northwind's September payroll, with the federal income tax already worked from each W-4. Fill in each employee's Social Security (6.2%), Medicare (1.45%) and net pay. Round each tax to the cent, on its own; net pay is what is left. Type it in the workbook at https://lopifi.com/playground.

> **Net pay is the remainder. Gross less federal income tax from the W-4, less 6.2% Social Security up to the wage base, less 1.45% Medicare (plus 0.9% over $200,000), less the state's taxes.**

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

## Pages in this lesson

- [The W-4 withholding worksheet](https://lopifi.com/md/learn/gross-to-net-pay/w-4-withholding-worksheet) — 6 min. How is federal income tax withholding calculated from a W-4?

## Where this lesson's rules come from

- [IRS Pub. 15-T (2026), Introduction — Rounding](https://www.irs.gov/pub/irs-pdf/p15t.pdf) (PDF) — Federal income tax withholding methods — Worksheet 1A and the 2026 percentage method tables (irs)
- [IRS Pub. 15 (2026), What's New](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Social Security and Medicare tax for 2026 (irs)
- [IRS Pub. 15 (2026), §9](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Additional Medicare Tax withholding (irs)
- [IRS Pub. 15 (2026), What's New](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Withholding on supplemental wages — bonuses and commissions (irs)
- [IRS Pub. 15 (2026), §7](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — What supplemental wages are (irs)
- [Form W-4 (2026)](https://www.irs.gov/pub/irs-pdf/fw4.pdf) (PDF) — Form W-4, Employee's Withholding Certificate (form)
- [IRS Pub. 15-B (2026), §1 Cafeteria Plans; §2 Table 2-1](https://www.irs.gov/pub/irs-pdf/p15b.pdf) (PDF) — Employer's Tax Guide to Fringe Benefits (irs)
- [IRC §3121(a)(5)(G)](https://www.law.cornell.edu/uscode/text/26/3121) — Cafeteria plan payments are not FICA wages (statute)
- [SSA, Contribution and Benefit Base](https://www.ssa.gov/oact/cola/cbb.html) — The Social Security wage base, by year (agency)
- [Wikipedia, “Federal Insurance Contributions Act”](https://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act) — Federal Insurance Contributions Act tax (reference)

## Read further

- https://lopifi.com/md/journal-entries/payroll
- https://lopifi.com/md/startups/payroll-journal-entries
- https://lopifi.com/md/startups/w2-year-end-for-startups

- **Track:** [Payroll](https://lopifi.com/md/learn/payroll)
- **Lesson:** Lesson 2 of 8 — 12 min
- **Terms taught:** [Gross pay](https://lopifi.com/md/glossary/gross-pay), [Net pay](https://lopifi.com/md/glossary/net-pay), [Payroll register](https://lopifi.com/md/glossary/payroll-register), [Federal income tax withholding](https://lopifi.com/md/glossary/federal-income-tax-withholding), [FICA](https://lopifi.com/md/glossary/fica), [Social Security wage base](https://lopifi.com/md/glossary/social-security-wage-base), [Additional Medicare Tax](https://lopifi.com/md/glossary/additional-medicare-tax), [Supplemental wages](https://lopifi.com/md/glossary/supplemental-wages)
- **Previous:** [Hiring your first employee, Payroll · Lesson 1](https://lopifi.com/md/learn/hiring-your-first-employee)
- **Next:** [The W-4 withholding worksheet](https://lopifi.com/md/learn/gross-to-net-pay/w-4-withholding-worksheet)
- **The course:** https://lopifi.com/md/learn