Personal Finance
Net Income
Net income summary:
When your employer issues your paycheck, it takes out taxes and any other applicable deductions.
The remaining amount is your net income.
Net income tells you how much money you actually have, so it’s more useful for budgeting than your gross income.
Net Income Definition and Meaning
Net income is the amount that a person receives from each paycheck, also known as their take-home pay. To calculate your net income, take your gross income (your full salary) for the pay period, and then subtract taxes and other deductions. You can normally find both your net income and gross income on your paystub.
How Net Income Works
Your net income is your gross income minus all the deductions that come out of it. These deductions may include:
Income taxes: You’ll pay federal income taxes, as well as possibly state and local income taxes depending on where you live.
Social Security and Medicare taxes: U.S. workers pay taxes to fund the Social Security and Medicare programs.
Retirement plan contributions: If you contribute to a retirement account at work, such as a 401(k) plan, contributions are generally taken directly from your paycheck.
Some deductions are under your control. If you want to change your tax allowances, which affect the amount of taxes that are withheld from each paycheck, you can submit a new W-4 to your employer. You may want to review and possibly adjust your withholdings after major life events, such as getting married or having children.
If you have a retirement plan, you decide how much to contribute. Higher contributions mean you save more for retirement but have lower net income. If you need more money to pay your bills, you could reduce your retirement contributions to increase your take-home pay.
Why Net Income Is Important
Your net income is the foundation of your budget, because it shows you exactly how much money you have to spend. Gross income is the total amount you earn, but not all of that money makes it into your paycheck.
When you know your net income, you can accurately figure out what you can afford for expenses, such as housing and a car payment. You can set realistic savings goals. And if you’re paying off debt, any payment plan or debt relief measure starts with your net income.
Real-Life Example of Net Income
Let’s say you earn a yearly salary of $60,000, live in California, and your employer pays you every two weeks. Your gross income per paycheck would be about $2,308. If you’re a single tax filer, your net income would probably be around $1,827 because of these deductions from your paycheck:
$199 in federal income taxes
$143 in Social Security taxes
$33 in Medicare taxes
$78 in California state income taxes
$28 in state disability insurance
In this example, there’s a difference of $481 every two weeks between gross income and net income.
Net Income FAQs
What’s the difference between net income and gross income?
Gross income is the total amount that a person earns. Net income is the remaining amount after taxes and any other deductions. Since net income is the amount that a person takes home from each paycheck, it’s also known as take-home pay.
How do you budget net income?
To budget net income, plan how you’re going to use all the money you earn. There are several popular budgeting methods, including the 50/20/30 rule, where you spend 50% of net income on needs, use 20% for savings, and use 30% for wants. Another option is a zero-based budget, where you allocate every dollar toward an expense, including savings.
How much should I save from my net income?
Try to save 20% of your net income if you can. If that’s not possible, start with an amount you can afford, and then try to increase it later.
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