Take-Home Pay

Take-home pay is the money an employee actually receives for a pay period, whether by direct deposit, paper check or pay card, after all deductions have been subtracted from gross earnings. It is the figure most people use for household budgeting, because it is what is available to spend or save. In payroll and accounting terms the same amount is called net pay; take-home pay is the everyday name used from the employee's point of view.

The difference between gross pay and take-home pay can be large. For a typical US employee, federal and state income tax withholding, Social Security and Medicare taxes, retirement contributions and health insurance premiums together often take 20 to 35 percent of gross pay, depending on income, location and benefit choices.

• Federal income tax withholding, based on the employee's Form W-4 and IRS withholding tables. It is an estimate of the year's tax, settled when the employee files a return. See withholding tax.
• FICA taxes under the Federal Insurance Contributions Act: 6.2 percent for Social Security up to the annual wage base, and 1.45 percent Medicare tax, plus 0.9 percent additional Medicare tax on wages above $200,000.
• State and local income taxes, which vary widely; several states, including Texas and Florida, have no state income tax on wages.
• Pre-tax deductions, such as traditional 401(k) contributions and health, dental and vision premiums paid through a cafeteria plan, which reduce taxable income.
• Post-tax deductions, such as Roth 401(k) contributions, union dues, charitable payroll giving and court-ordered garnishments.

Pre-tax treatment differs by tax. Traditional 401(k) contributions reduce wages subject to federal income tax but not FICA, while cafeteria plan health premiums generally reduce both.

An employee earns a salary of $60,000 a year, paid every two weeks, so gross pay per period is $60,000 divided by 26, or $2,307.69. She contributes 5 percent to a traditional 401(k), $115.38, and pays $80 in health premiums through a cafeteria plan. Her FICA wages are $2,227.69, giving Social Security tax of $138.12 and Medicare tax of $32.30. Using illustrative figures, her employer withholds $160 of federal income tax and $90 of state income tax. Take-home pay is:

Here gross pay is $2,307.69, taxes withheld total $420.42 and other deductions total $195.38, so take-home pay is $1,691.89, about 73 percent of gross pay. The employer records the full $2,307.69 as salary expense, with the deductions held as liabilities, such as 401(k) payable, until paid over.

• Changes to the W-4, such as claiming dependents or asking for extra withholding, change federal income tax withheld but not the tax ultimately owed.
• Reaching the Social Security wage base late in the year stops the 6.2 percent deduction, so high earners see larger paychecks in the final months.
• Raising retirement contributions lowers take-home pay, but by less than the contribution, because of the tax saving on traditional contributions at the employee's marginal tax rate.
• Bonuses are often withheld at a flat supplemental rate, 22 percent for federal tax on supplemental wages up to $1 million, which can make bonus take-home pay seem low.
• Annual benefit enrollment changes premiums, often from the first paycheck in January.

Employees should review their pay stubs, which list gross pay, each deduction and net pay, to check that withholding is reasonable and deductions are correct. Services such as earned wage access let workers draw part of their take-home pay before payday, usually for a fee, and the amount advanced is then deducted from the next paycheck. The mechanics of calculating and paying wages are covered under payroll and salary disbursement.

• Internal Revenue Service