What is Take-home pay?
Take-home pay, also known as net salary or net pay, is the net amount of income received by an employee after the deduction of benefits, taxes, and voluntary contributions from a paycheck that the employee actually takes home. Take-home salary is the difference between the gross income and all deductions. These deductions consist of Social Security, federal, state and local income tax, Medicare contributions, retirement account contribution and other insurance premiums.
Net Salary/ Take Home Pay = Gross Salary- Income Tax- Public Provident Fund- Professional Tax.
Employee and Public Provident Fund are a stipulated percentage of the employee’s salary whereas gratuity is a percentage of the basic salary. Therefore, an employee’s take-home salary should ideally look like-
Net Salary/ Net Salary= Direct benefit – deductions (Such as Taxes, PF etc.)
Income Tax is deducted at source by the employer and is based on the employee’s gross pay. Also, employees basic pay should be at least 50%-60% of his/her gross salary.
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Breaking Down Take-Home pay
Paycheck or pay statements includes the detail of net pay and other income activity such as deductions and earning for a given pay period. The common deductions are Federal Insurance Contributions Act (FICA) withholdings and income tax. There may also be less standard deductions such as uniform upkeep cost and court-ordered child support or alimony. Many pay statements also states the year-to-date withholdings, earnings and deduction amounts.
Gross Pay may be calculated by multiplying the hourly wage by the number of hours worked in a pay period or annual salary divided by the number of pay periods.
For example, a bi-monthly paid employee earning an annual salary of $40,000 will have gross pay of $1,538.46 ($40,000/26 pay periods).
Other deductions that impact Take-home salary includes:
- Wage garnishments
- HAS account contributions
- 401(k) or other retirement contributions
- FSA account contributions
- Medical, health or dental insurance premiums
Take-home pay versus Gross Pay
As Take-home salary is a net pay that an employee takes home after taxes and other deductions whereas gross pay is the total income an employee earns before taxes and deductions.
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For example, if an employee’s hourly earnings is US $20 per hour and works for 80 hours per pay period, the gross pay will stood at (US $20 X 80 hours) and after deductions the take-home pay is US$900 (900/80=11.25), if the employee is earning US$11.25 per hours.
Banks, lending agencies, and sometimes credit rating firms are concerned about take-home salary when giving loan for property, cars and vehicles.
Steps for Calculating take-home pay
- Subtract pre-tax deduction
The first step is to calculate taxable income by deducting pre-tax deductions and then use the total to estimate the tax bracket for federal income tax withholding.
- Calculate income taxes
There are various income taxes such as local, federal and state income taxes that are deducted from gross pay (Minus any pre-tax deductions). The federal tax depends of the employee’s tax filing status and bracket.
- Calculate payroll taxes
After deducting income taxes from gross pay calculate Medicare and Social Security taxes and deduct it from total wages.
Social Security tax is calculated by multiplying the gross wages (Minus any pre-tax deductions) by 6.2%. Deduct 6.25 from gross wages unless the employee earns more than Social Security wage base.
Medicare taxes are calculated by multiplying gross wages (minus any pre-tax deductions) by 1.45% and then its total amount is subtracted from the gross pay.
- Subtract after-tax payroll deductions
Deduct ant other post-tax deductions, such as Roth contribution from gross wage.
- Determine take-home pay
At last to calculate take-home pay, add taxable income, income taxes and other deductions together and then, subtract the total from gross wage.