Take-home pay

Take-home pay is the bottom line of the pay stub, the amount the direct deposit is for. Everything between it and the gross figure at the top is a deduction of one of three kinds: tax, which is gone; a benefit, which bought something; or savings, which are still yours in another account. On a $6,200 month of gross pay, $1,800 comes out and $4,400 arrives, and the $4,400 is the only one of those figures a budget can spend. A raise, a new withholding form and open enrollment each change it, which is why it is read from the stub rather than worked out from the salary.

In a sentence

• "My take-home pay is $4,400 a month on a $74,400 salary, and the budget is built on the $4,400."
• "The lender asked about gross income; the budget runs on take-home pay."
• "Raising the 401(k) contribution lowers take-home pay by less than the contribution, because the income tax withheld falls with it."

How it's calculated

Take-home pay = gross pay − pre-tax deductions − Social Security and Medicare − income tax withholding − after-tax deductions

1. Start with gross pay for the period, the salary divided by the number of pay periods, or the hours times the rate.
2. Take out the pre-tax deductions. Health, dental and vision premiums under an employer's plan, HSA and FSA contributions, and a traditional 401(k) contribution come out before income tax is figured, so they lower the withholding as well as the pay. The premiums also come out before Social Security and Medicare; a 401(k) contribution does not.
3. Take out Social Security and Medicare, 6.2% and 1.45% of the wages that remain, at flat rates the W-4 does not touch. Social Security stops for the year once wages pass an annual cap the government sets.
4. Take out income tax withholding. Federal withholding is set by your Form W-4 and the withholding tables for your pay frequency; state withholding, where the state has an income tax, and any local tax are figured the same way.
5. Take out the after-tax deductions, such as a Roth 401(k) contribution, union dues, a wage garnishment or supplemental life insurance.
6. What remains is take-home pay.

An example

A $74,400 salary, shown as one month of pay. The withholding figures are the example's assumptions.

Of the $1,800 that came out, $1,290 was tax and $510 bought health insurance or moved into the retirement account. The federal figure is an estimate that the return settles the following spring, as a refund or a bill. And the $310 is saving that has already happened: a household judging its savings share adds it back to both sides, since it was take-home pay before it was deducted.

Why it matters

Take-home pay is the income a budget is built on, and every other income figure overstates it. The mistake the term prevents is planning on the salary divided by twelve, which in the example is 41% more than arrives, or reading a raise as its gross amount. It also decides comparisons: two jobs with the same salary in different states, or with different premiums, pay different amounts into the account, and the stubs settle it where the offer letters cannot.

Take-home pay versus gross income

Gross income is what you earn; take-home pay is what you receive after every tax and deduction. The two are used for different things: a landlord's rent rule and a lender's debt-to-income ratio are measured on gross income, and a budget, the 50/30/20 rule and a savings rate are measured on take-home pay. A rent at 30% of gross income is close to 40% of take-home pay, which is why a rent that clears the rule can still leave a tight month. The self-employed have a third figure between the two, net income after business expenses and before the tax set-aside.

Common questions

Is take-home pay the same as net income? On a pay stub, yes; net pay and take-home pay are the same bottom line. For a business or a freelancer, net income is revenue after expenses and before the owner's taxes, a different figure.

Why is my take-home pay lower than my salary divided by twelve? Because of everything on the stub between the two: income tax withholding, Social Security and Medicare, and the premiums and contributions you elected. In the example those come to $1,800 a month, 29% of gross.

Should I budget on gross or take-home pay? Take-home pay. If a retirement contribution leaves the paycheck before you see it, count it toward savings when you judge a savings share; otherwise a household saving through payroll reads as saving nothing.

How can I raise my take-home pay without a raise? A new Form W-4 lowers the withholding if a large refund arrives every year, moving that money into the paychecks. Cutting a pre-tax contribution raises take-home pay too, but by less than the contribution, because the income tax withheld rises with the taxable wages.

Does take-home pay change during the year? Yes. Benefit elections change it at open enrollment, a new W-4 changes it on the next payday, a raise changes it by less than the raise, and a high earner's pay rises late in the year when Social Security stops at its cap.

Go deeper

• The Budget calculator splits monthly take-home pay into needs, wants and savings with the 50/30/20 rule or shares of your own, and shows the dollar amount each bucket gets.
• What percentage of your income should go to rent, food, and savings finds your own shares from take-home pay and three months of spending, and says which of the common rules use gross income instead.
• How to calculate your savings rate adds the retirement contribution back to take-home pay on both sides of the rate, so saving through payroll is not read as saving nothing.

Where it shows up in Zypper

Zypper budgets income the way it budgets spending. An income category holds what you expect to earn each month, at a frequency of Twice per month, Every two weeks, Every week or Every month to match the schedule you are paid on, and its row shows Earned against that amount as the paychecks arrive, with $X remaining for what you still expect this month and $X extra when the month brought in more. Above the category list, Left to budget is your expected income minus everything you have budgeted for spending, every amount standardized to monthly; a negative figure means the plan spends more than you expect to earn. See Creating your budget for the details, or get started with Zypper to budget on what actually arrives.