A gross distribution is the full amount of a payment before any taxes, penalties, or other deductions come out. The net distribution is what actually reaches your bank account after those subtractions. The difference between net vs. gross distribution can be small on a routine paycheck and startlingly large on a retirement withdrawal or bonus, because each type of payment follows its own withholding rules. The gross figure is what gets reported to the IRS; the net figure is what you have to spend.
Why the Two Numbers Differ on a Paycheck
Gross wages are your total compensation for the pay period. Several layers of deductions stand between that figure and your net deposit.
The first layer is payroll tax under the Federal Insurance Contributions Act. Social Security tax takes 6.2% of wages up to an annual cap of $184,500 for 2026; wages above the cap escape the Social Security portion.1Social Security Administration. Maximum Taxable Earnings Medicare tax takes another 1.45% with no cap, and an additional 0.9% Medicare surtax applies to wages above $200,000 for a single filer or $250,000 for joint filers.2Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Federal income tax withholding is usually the largest deduction. Your employer calculates it from the Form W-4 you filed and the IRS withholding tables.3Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate State and local income tax, where applicable, shrinks the check further.
After the mandatory taxes come pre-tax deductions. Traditional 401(k) contributions and employer-sponsored health insurance premiums are the most common. These come out before federal income tax is calculated, so they cut your tax bill as well as your take-home pay.4Internal Revenue Service. 401(k) Plan Overview A $5,000 gross paycheck with a $500 traditional 401(k) contribution leaves only $4,500 subject to federal income tax withholding. FICA still applies to the full $5,000, though, because 401(k) deferrals are not exempt from Social Security and Medicare tax.
Post-tax deductions come last. Roth 401(k) contributions, union dues, and court-ordered garnishments come out after all taxes are figured. They lower your net pay without lowering your tax bill.
Why Box 1 of Your W-2 Looks Too Low
Box 1 of your W-2 is not your gross wages. It’s your taxable wages after pre-tax items like 401(k) contributions, health insurance premiums, and FSA contributions have already been removed. Earn $80,000 gross and contribute $10,000 to a traditional 401(k), and Box 1 will show roughly $70,000 while Box 5 (Medicare wages) still shows the full $80,000. That gap is by design, not an error.
Bonuses and Other Supplemental Wages
Supplemental wages such as bonuses and commissions follow a different withholding path. Employers can use a flat 22% federal rate on the first $1 million of supplemental wages in a year and 37% above that.5Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide Social Security and Medicare taxes still apply on top. A $10,000 bonus rarely nets more than about $7,000. If your marginal rate is below 22%, the difference comes back at tax time; if it’s higher, you owe the balance.
Retirement Distributions: Where the Gap Gets Biggest
Retirement withdrawals are where net vs. gross catches people off guard, because the withholding rate depends on the account type and how the money moves.
401(k) and Other Employer Plans
When you take a distribution from a 401(k), 403(b), or similar employer plan and the check comes to you, federal law requires 20% withholding on the taxable portion. You cannot opt out.6Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions On a $50,000 gross distribution, $10,000 goes to federal withholding and $40,000 lands with you before any state tax. Form 1099-R still reports $50,000 as the gross distribution.7Internal Revenue Service. Instructions for Forms 1099-R and 5498
The 20% is only a prepayment. If your marginal rate is 24% or 32%, you’ll owe the balance when you file. People who spend the $40,000 as if it were theirs often face a surprise bill the following April. If you know your bracket runs higher than 20%, ask the plan to withhold more.
Direct rollovers escape the 20% rule. Money moved straight from an old 401(k) to a new plan or IRA has no withholding and no taxable event.6Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Traditional IRAs
IRA distributions follow a different regime. The default federal withholding is 10%, not 20%, and you can opt out entirely by filing Form W-4R with the custodian, or choose a higher rate. Opting out shifts the tax burden to estimated payments or your April return, and misjudging that can trigger an underpayment penalty.
The Early Withdrawal Penalty
If you’re under 59½ and take a distribution from a traditional retirement account, the IRS adds a 10% tax on the taxable portion.8Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs The penalty sits on top of the regular income tax and is not covered by the standard 20% or 10% withholding. On the $50,000 example, you’d owe another $5,000 in penalty, and the amounts already withheld only reduce the penalty if your total withholding exceeds your total tax. Exceptions exist for disability, certain medical expenses, and (for IRAs) a first-time home purchase, among others.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
When Gross Equals Net: Roth Accounts
Roth IRAs and Roth 401(k) accounts flip the math. Contributions were already taxed, so qualified distributions come out entirely tax-free, and the gross and net figures match.10Internal Revenue Service. Roth IRAs To qualify, the account must have been open at least five years, and you must be 59½ or older, disabled, or using up to $10,000 for a first home. Nonqualified withdrawals can be partially taxable, and the earnings portion may catch the 10% early withdrawal penalty.
Investment and Business Distributions
Outside retirement accounts, gross and net still diverge, but the mechanics change.
Dividends and Capital Gain Distributions
Form 1099-DIV reports total ordinary dividends in Box 1a and capital gain distributions in Box 2a.11Internal Revenue Service. Form 1099-DIV Those are gross figures. Your actual receipt can be lower if the brokerage deducted management fees, advisory charges, or foreign taxes before crediting the account.
Tax treatment then diverges again. Qualified dividends are taxed at long-term capital gains rates that top out at 20%; ordinary (nonqualified) dividends are taxed at your regular income rate, which can reach 37%. Two investors receiving the same gross dividend can net very different amounts.
Partnership and S Corporation K-1s
Owners of partnerships and S corporations receive a Schedule K-1 reporting their allocated share of income, deductions, and credits.12Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S) The tricky part: you owe tax on the K-1 income whether the entity distributed cash or not. You can be allocated $100,000 of income and receive only $60,000 in cash. Some entities pay “tax distributions” to help owners cover the bill, but the amount and timing depend on the operating agreement. Tax is owed on the gross allocation, not the net cash.
Backup Withholding
If you haven’t given a payer a valid taxpayer identification number, or the IRS has told the payer your TIN is wrong, the payer must withhold 24% from your distributions.13Internal Revenue Service. Backup Withholding It applies to dividends, interest, and other investment income, and it can open a sudden gap between gross and net. Filing a correct Form W-9 prevents it; the withheld amount counts toward your tax when you file.
Garnishments: Another Layer Between Gross and Net
Court-ordered wage garnishments add a further subtraction to a paycheck. Federal law caps most consumer-debt garnishments at 25% of disposable earnings for the week.14Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment “Disposable earnings” means what’s left after legally required deductions like taxes and FICA. Voluntary items like 401(k) contributions and health premiums are not subtracted first, so the garnishable base is higher than many workers expect.15U.S. Department of Labor. Fact Sheet #30: Wage Garnishment Protections of the Consumer Credit Protection Act
Child support and alimony orders reach further: up to 50% of disposable earnings if you’re supporting another spouse or child, 60% if not, plus another 5% if you’re more than 12 weeks behind.14Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment A worker with $4,000 in monthly disposable earnings who is behind on support and not supporting anyone else can see up to $2,600 garnished. State law may set tighter limits.
When the Reported Gross Looks Wrong
If the gross on your W-2 doesn’t match your records, ask your employer for a corrected Form W-2c.16Internal Revenue Service. About Form W-2 C, Corrected Wage and Tax Statements If nothing arrives by the end of February, call the IRS at 800-829-1040. The IRS will contact the employer and send you Form 4852, a substitute you can file with your best estimates.17Internal Revenue Service. Topic No. 154, Form W-2 and Form 1099-R (What to Do if Incorrect or Not Received)
The same process applies to an incorrect 1099-R. Contact the plan administrator or IRA custodian first; if a corrected form doesn’t come in time, file with Form 4852. If the corrected form later shows different numbers, amend your return on Form 1040-X. Filing on time with estimates beats filing late while you wait.