Many teenagers start their first jobs and receive their first paychecks with a shock: the amount of their paycheck is not the same as the amount they've earned. Instead, they've "lost" money to agencies like Social Security and Medicare. In some states, they may have contributed to unemployment and disability insurance without their knowledge. Understanding this earnings gap highlights the difference between net and gross wages.
The term "gross wages" refers to the amount of money earned in a given pay period. Gross wage is calculated by multiplying the number of hours worked by the hourly rate of pay. Salaried employees can divide their annual salary by the number of pay periods to determine their gross wages. Gross wages are sometimes called pretax wages because they represent wages earned before any taxes or other deductions have been withheld.
"Net wages" refers to the money an employee receives after all the appropriate taxes and other deductions have been withheld from his gross pay. The paycheck for a given pay period will have the net wages as its amount, with the amounts that were withheld from the gross pay generally listed on the check stub. Net wages are also referred to as take-home pay.
Standard Payroll Deductions
There are several mandatory payroll deductions that are withheld from all employees working in the United States. The Federal Insurance Contributions Act, or FICA, withholding provides for the employee's Social Security and Medicare contributions, which as of January 2011 constitutes 7.65 percent of gross wages. Federal income tax is withheld from almost every employee; in many areas, state and local income taxes are withheld as well.
Other Payroll Deductions
A host of other payroll deductions -- some optional and some required -- may also appear on an employee's paycheck, depending upon her circumstances: 401(k) retirement plan contributions, employee-paid health insurance premiums, child-support payments, legal wage garnishments and union dues may all be withheld from an employee's gross pay under certain circumstances.