What is take home pay?

How do we define take-home pay?

Take-home pay, often referred to as net pay or net income, is the amount an employee actually receives after deductions are taken from their gross salary, such as tax and other withholdings. It denotes the portion of pay an employee can take home.

Take-home pay can differ considerably depending on where an employee lives and the level of their earnings.

Calculating take-home pay

Generally, working out an employee’s take-home pay is straightforward. It is the sum left after the following deductions have been applied:

Income taxes. The level of tax withheld depends on several factors, including the employee’s earnings, any applicable tax credits and the tax jurisdiction (for example national, state, provincial or municipal).

Social security. Many jurisdictions require social security contributions to be deducted; these may be calculated as a percentage of salary or charged at a fixed rate.

Retirement/pension contributions. If the employee is enrolled in a retirement or pension scheme, contributions are often taken from gross pay.

Health insurance. Where employers provide health cover they may deduct premiums from pay; the charge varies with the level of cover and how costs are shared.

Other deductions. This category covers other withholdings such as flexible spending arrangements, union subscriptions or other voluntary deductions.

Bear in mind that employees who have the same gross salary can still receive different take-home pay because of a variety of additional factors, for example:

• Commissions and bonuses
• Number of dependants
• Tax preferences (for example, as indicated on a W‑4 form in the US)
• Court-ordered withholdings
• Additional income from other employment