Gross salary represents the amount of wages paid to an employee prior to reductions for prepaid income taxes, Federal Insurance Contributions Act (FICA) taxes, Medicare taxes and a variety of state and local taxes. Salary after those tax payments is known as an employee's net salary.
Difference Between Gross and Net
The U.S. Internal Revenue Service (IRS) requires U.S. employers to withhold prepaid income taxes from an employee's salary. The amount of withholding is based on personal information provided by the employee, the amount of the employee's gross salary or wage payment and rate tables produced by the U.S. Department of the Treasury. Employers that fail to withhold proper amounts from an employee's salary may be subject to fines and penalties. In addition, employees who fail to prepay sufficient income tax are subject to penalties and interest charges.
FICA is an income-based payroll tax used to fund the Social Security and Medicare system. Because the amount of a taxpayer's future Social Security benefits are directly tied to that taxpayer's FICA contributions, many people consider FICA to be a mandatory retirement savings plan. FICA taxes are required by law to be funded 50 percent by employers and 50 percent by employees. Only the employee portion is deducted from gross salary or gross wages. For 2017, Social Security tax is set at 12.4 percent of gross salary up to $127,200. After $127,200, no Social Security tax is due. For 2018, the maximum gross salary taxed is $128,400.
Employee payments to Medicare are also deducted from an employee's gross wages. Medicare taxes are paid 1/2 by employers and 1/2 by employees. The Medicare tax rate for 2017 is set at 2.9 percent and unlike Social Security tax has no upper income wage limitation. Also unlike Social Security tax, Medicare taxes paid are not linked to the amount of future Medicare benefits afforded a taxpayer.
The amount of income you receive after taxes is your net income.
State and Local Taxes
Gross salary is typically further reduced by a wide variety of state and local taxes, fees and surcharges. These taxes vary greatly from jurisdiction to jurisdiction. Often these deductions include local income tax withholding, local occupation tax, employee-funded state unemployment insurance or any variety of state or local income-based surcharges. In general, taxpayers may deduct state and local income-based taxes on their federal income tax returns.
Each of the 50 U.S. states has differing income tax rules and regulations. In general, however, the requirements for state income tax withholding follow the same guidelines as federal income tax withholding, with the significant exception that state tax rates are generally greatly below federal levels. Income tax is withheld by employers on behalf of employees at rates provided by each state's department of revenue or taxation. A few states, including Florida, Texas, Washington and New Hampshire, have no state income tax and, thus, no state income tax withholding requirement.
Read More: How to Calculate the Federal & State Taxes That Have Been Withheld From Your Salary
2018 Tax Law Changes
The maximum amount of income taxable for Social Security is increasing slightly for 2018. On the other hand, federal tax rates are generally declining for most income levels, so you may save tax money overall compared to previous years.
Generally, the principle of gross vs. net income is unchanged for 2018.
2017 Tax Law
Use the 2017 tax rules and forms for filing for 2017, even if you're filing in 2018 or a subsequent year.
Gross income generally refers to income before taxes. Gross salary or gross pay refers specifically to what you make from work before taxes are paid.
- U.S. Department of the Treasury, Internal Revenue Service: Publication 15, Circular E, Employer's Tax Guide
- Social Security Administration: Social Security and Medicare Tax Rates
- Social Security Online: Contribution and Benefit Base
- Kiplinger: 9 States with No Income Tax
- Journal of Accountancy: Social Security Administration Announces Small Increase in 2018 Wage Base
- What is FICA Tax and How is it Calculated? – Financial Security for All
- IRS. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Oct. 24, 2020.
- Social Security Administration. "Social Security & Medicare Tax Rates." Accessed Oct. 24, 2020.
- Social Security Administration. "Social Security Administration Fact Sheet." Accessed Oct. 24, 2020.
- IRS. "Topic No. 602 Child and Dependent Care Credit." Accessed Oct. 24, 2020.
- IRS. "Tax Benefits for Education: Exclusions From Income." Accessed Oct. 24, 2020.
- IRS. "Publication 15 (2020), (Circular E), Employer's Tax Guide." Accessed Oct. 24, 2020.
- IRS. "Publication 525 (2019), Taxable and Nontaxable Income." Accessed Oct. 24, 2020.
- Pennsylvania Department of Revenue. "Personal Income Tax." Accessed Oct. 24, 2020.
- Urban Institute. "Individual Income Taxes." Accessed Oct. 24, 2020.
- Ohio Department of Taxation. "Municipal Income Tax Forms & Information." Accessed Oct. 24, 2020.
- Indiana Department of Revenue. "Departmental Notice #1." Accessed Oct. 24, 2020.
- Iowa Department of Revenue. "School District Surtax." Accessed Oct. 24, 2020.
- Iowa Policy Project. "Understanding Local Income Surtax In Iowa." Accessed Oct. 24, 2020.
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.