Take-home pay, also known as net income, is the amount of money an employee earns after taxes, benefits, voluntary contributions, and deductions have been subtracted from the paycheck.
Details of gross income, deductions, and net pay are reflected on the employee pay stub for a particular pay period.
Employee vs. employer costs
The money paid to an employee’s bank account is not their total cost to the company.
An employee’s gross income combined with employer expenses impact the total cost of the company, yet only employee withholdings affect take-home pay.
Gross income vs. net income
Gross income differs from net income, and employee withholdings determine the difference. Employee withholding affects take-home pay by subtracting deductions and benefits from the gross pay, ultimately leading to the net income.
Employee withholding refers to the amount of federal income tax withheld (determined by the current tax rate). The total is determined by the amount of money that an employee earns, as well as the information outlined on the W-4 form.
Employees must provide their filing status when submitting Form W-4, specifying the number of dependents, working multiple jobs, or other necessary adjustments.
Employees add to overall company expenses, including recruitment, training, payroll taxes and processes, and more. Yet while these employer expenses impact the total employee cost to the company, they do not affect take-home pay.
How to calculate your take-home pay
Job seekers should know that an advertised salary does not necessarily translate into take-home pay. Instead, gross income, also known as base pay, is whittled down by deductions and benefits, ultimately leading to net income.
Consider the basic formula to determine net income;
- Determine taxable income by deducting pre-tax contributions to benefits
- Withhold all relevant federal, state, and local taxes
- Deduct any post-tax contributions to benefits
- Garnish wages if applicable
- Net income remains
Understanding benefits and deductions in the United States
These pre-tax deductions and post-tax deductions may vary from one organization to another, but standard deduction examples in the United States include;
- Federal income tax paid to the IRS
- State income tax
- Local income taxes
- FICA taxes (Federal Insurance Contributions Act) such as social security taxes and Medicare taxes
- Employee benefits such as 401(k) contributions and contributions to a medical insurance plan
- Contributions to a retirement plan
- Wage garnishments to pay outstanding taxes, child support, medical bills, etc
Each of these deductions and benefits is printed on an employee’s paycheck, noting all withholdings that impact the take-home pay.
Understanding worldwide benefits and deductions
The business landscape has shifted in a global direction, leading to an increase in remote teams. Prioritizing compliance when hiring worldwide protects businesses against mistakes and legal issues.
Maintaining global benefits and deductions is one way to remain compliant and improve employee satisfaction. In addition to health insurance premiums and retirement contributions, businesses can also offer paid employee leave and tuition reimbursement.
Calculating take-home pay can be overwhelming, especially when working with an international team. Deel’s take-home pay calculator simplifies the calculation, helping new hires understand their net income. Try the paycheck calculator and make a competitive offer.
Take-home pay for contractors
Calculating the take-home pay for self-employed contractors differs from permanent employees earning an annual salary over a set number of pay periods.
Both groups of workers are taxpayers, but the earnings are determined differently as employers don’t pay contractors income tax withholding. Instead, the tax liability falls on the contractor’s shoulders.
A 1099 contractor creates an invoice that outlines the amount due for services completed and gets paid accordingly. From here, the contractor is responsible for paying income tax (based on tax brackets) and self-employment tax.
When determining a contractor’s take-home pay, tax deductions are subtracted from their invoiced amount. These deductions may include home expenses, office, and business expenses, travel and car expenses, and business development.
Why you might take home more (or less) than your coworker
Salary discussions are traditionally taboo, but as transparency becomes increasingly important, coworkers may chat about the differences in their take-home pay.
Factors that affect take-home pay include:
- The number of dependents
- Presence of a second (or third) job
- Asking for more (or less) withholding on the W-4 form
- Commissions earned on top of the base salary
- Bonuses earned throughout the year
- Wage garnishments, as demanded by the courts