Gross pay, net pay and what sits between them
Gross pay is what you earned. Net pay is what lands. The distance between them is the single most useful number to understand about a job, and it is usually between 25 and 35 per cent of gross for a typical US employee.
The bridge
Take an $80,000 salary, biweekly, single filer with a standard deduction, taxed in a state with a 5 per cent income tax.
| Line | Per pay period |
|---|---|
| Gross | $3,076.92 |
| Section 125 health premium | -$180.00 |
| Traditional 401(k) at 6% | -$184.62 |
| Taxable wages | $2,712.30 |
| Federal income tax withheld | -$268.00 |
| State income tax withheld | -$136.00 |
| Social Security 6.2% | -$168.16 |
| Medicare 1.45% | -$39.33 |
| Net pay | $2,100.81 |
Net is 68 per cent of gross. Note that FICA is charged on the figure after the health premium and the retirement deferral, but the income tax would have been charged on the gross without those two lines, which is the difference those elections make.
What the employer pays on top
The employer adds its own 6.2 and 1.45 per cent, about $6,120 on this salary, plus unemployment insurance and its share of the health premium, often another $6,000 or more. The true cost of this employee is close to $95,000.
Using this when comparing offers
- Ask for the premium share, the match and the vesting schedule before comparing gross.
- Value a match at its face only if you will actually defer enough to receive it.
- Price the commute and the parking, since a $3,000 transit subsidy is worth more than $3,000 of salary.
- Adjust for state income tax. The same gross in a no-tax state can be worth several thousand more in net.
The one number worth knowing
Work out your own net-to-gross ratio from a real stub. It converts any salary figure into the money that reaches your account, and it makes an offer comparison a subtraction rather than a guess.