What is take-home pay?

Take-home pay definition and meaning

Take-home pay is the income which remains from an employee’s salary or wages after all payroll taxes, deductions, and garnishments are deducted. Take-home pay is also referred to as net pay or net salary. the amount received after tax, insurance and other deductions have been removed from an employee’s gross monthly salary. It is also known as net pay or net salary.

More about take-home pay and definition

Take-home pay is net pay. The Current Tax Payment Act of 1943 requires US employers to withhold and remit their employees’ income taxes on their behalf. This generally means that an employee’s paycheck will be for a lower amount than their gross salary for the pay period.

Deductions employers are required to make include federal income tax, as well state and local income taxes, contributions to FICA (Social Security and Medicare), contributions toward premiums for medical or dental insurance, and 401(k) retirement contributions.

How do you figure out take-home pay?

To calculate take-home pay, subtract all taxes and pre-tax deductions from gross pay. You can do this by hand or using a payroll software or online take-home pay calculator.

Here’s an example:

Kelly’s gross pay is $500. She pays $30 for health insurance premiums. Her tax liabilities are $35 for FICA, $60 for federal income tax, and $10 for state income tax. In this situation, Kelly’s take-home pay is $365. ($500-$30-$35-$60-$10)

Is take-home pay gross or net?

Take-home pay is considered net income. It’s the amount of money an employee earns after voluntary or mandatory deductions like taxes and health insurance premiums are subtracted from their gross earnings. You can think of net income as what an employee takes home on payday and the amount that’s deposited into their bank account.

How do pre-tax deductions affect take-home pay?

Pre-tax deductions reduce an employee’s taxable income and therefore increase their take-home pay. A few examples of pre-tax deductions that may raise take-home pay include health insurance premiums and 401(k) or health savings account (HSA) contributions.

Why is take-home pay less than gross pay?

Take-home pay is less than gross pay because it’s the amount an employee earns after all deductions have been subtracted from their gross pay. These deductions might be mandatory like federal, state, and local taxes and voluntary, such as health insurance and retirement contributions. An employee’s take home pay may be much less than their gross wages, especially if they have many high-value deductions.