Gross income is every dollar you earn before any taxes or deductions are removed. Net income is the amount that actually lands in your bank account after federal taxes, state taxes, Social Security, Medicare, and other withholdings are subtracted.
On a $70,000 annual salary, your gross income is $70,000. Your net income — the actual take-home pay — is typically $52,000 to $56,000 depending on your state, filing status, and benefit elections.
What Is Gross Income?
Gross income includes all earnings from all sources before anything is deducted:
- Wages and salaries
- Self-employment income
- Rental income
- Investment dividends and interest
- Capital gains
- Alimony received (for agreements prior to 2019)
- Unemployment benefits
- Retirement account distributions (in most cases)
The IRS uses your gross income as the starting point for your tax return. It determines whether you are required to file at all, and it feeds into the calculation of your adjusted gross income (AGI) and ultimately your taxable income.
What Is Not Included in Gross Income?
Some types of income are excluded from gross income by law:
- Gifts and inheritances (in most cases)
- Life insurance death benefits paid to beneficiaries
- Employer-paid health insurance premiums
- Contributions to a pre-tax 401(k) or HSA made through payroll
What Is Net Income?
Net income is what you actually receive after deductions are taken from your gross pay. For individuals, this typically means your take-home paycheck.
Deductions that reduce gross to net:
| Deduction | Typical Amount (2026) |
|---|---|
| Federal income tax withholding | Varies by bracket and W-4 |
| State income tax | 0%–13.3% depending on state |
| Social Security tax | 6.2% on wages up to $168,600 |
| Medicare tax | 1.45% (+ 0.9% above $200,000 single) |
| Pre-tax 401(k) contributions | Up to $23,500 |
| Health insurance premiums (pre-tax) | Varies by employer plan |
| HSA contributions | Up to $4,300 (individual, 2026) |
Pre-tax deductions like 401(k) and HSA contributions are unique: they reduce your gross income for tax purposes but also reduce your take-home pay. They appear in payroll before taxes are calculated.
The Income Ladder: From Gross to Taxable
Most people encounter several income figures, each a step below the previous:
| Income Type | What It Is |
|---|---|
| Gross income | All earnings before any deductions |
| Adjusted gross income (AGI) | Gross income minus above-the-line deductions (student loan interest, IRA, HSA, etc.) |
| Modified AGI (MAGI) | AGI adjusted back for certain items; used for Roth IRA and ACA eligibility |
| Taxable income | AGI minus the standard or itemized deduction — what the IRS taxes |
| Net income (take-home pay) | What you receive after withholding and payroll deductions |
AGI is the most important figure for tax planning because it gates eligibility for dozens of deductions and credits. See the full breakdown in the adjusted gross income guide.
Worked Example: $70,000 Salary, Single Filer in a Moderate-Tax State
| Step | Amount |
|---|---|
| Gross annual income | $70,000 |
| Pre-tax 401(k) contribution (6%) | −$4,200 |
| Adjusted gross income (before above-line deductions) | $65,800 |
| Standard deduction (2026, single) | −$15,000 |
| Taxable income | $50,800 |
| Federal income tax estimated | ~$6,236 |
| Social Security tax (6.2% of $70,000) | $4,340 |
| Medicare tax (1.45% of $70,000) | $1,015 |
| State income tax (est. 4%) | $2,800 |
| Health insurance premiums (pre-tax, monthly $150) | $1,800 |
| Estimated annual net income (take-home) | ~$49,609 |
In this example, the employee earns $70,000 gross but takes home approximately $49,609 — about 71 cents per dollar earned. The 401(k) contribution ($4,200) reduces take-home pay but also reduces federal and state taxes owed.
Gross Income vs Net Income: Key Differences
| Feature | Gross Income | Net Income |
|---|---|---|
| Definition | Total earnings before deductions | Earnings after all taxes and withholdings |
| Used for | Tax filing, loan qualification, benefit eligibility | Budgeting, bill payment, actual spending |
| Includes pre-tax deductions? | Yes | No |
| Changes with withholding elections? | No | Yes |
| Reported on W-2? | Box 1 (wages) is after pre-tax deductions; Box 5 is before | Not reported on W-2 |
When Each Figure Matters
Gross income matters for:
- Loan applications — mortgage lenders, auto lenders, and landlords qualify you based on gross monthly income
- Tax filing — the IRS and state tax agencies work from gross income
- Benefit eligibility — Roth IRA limits, premium tax credits, and income-driven student loan repayments use MAGI (a variant of gross income)
- Social Security calculations — your eventual benefit is based on lifetime gross earnings
Net income matters for:
- Budgeting — your monthly spending plan should be built on take-home pay, not gross pay. See the 50/30/20 rule for a framework
- Savings rate — financial goals like saving for a home or early retirement are calculated as a percentage of net income
- Emergency fund sizing — 3–6 months of net monthly expenses is the standard target
A common budgeting mistake is planning based on gross income and being surprised by how much less is actually available. Always budget from your net figure.
Self-Employed: Gross and Net Income Work Differently
If you are self-employed, gross income is your total revenue before business expenses. Net income is what remains after subtracting both business expenses and self-employment taxes.
Self-employment tax (15.3% on net earnings up to $168,600) effectively replaces both the employee and employer portions of Social Security and Medicare. You can deduct half of this tax on your federal return to arrive at AGI.
For more on how income is calculated and taxed at each level, see the federal income tax brackets and effective tax rate guides.
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