What is take home pay?

How is take-home pay defined?

Take-home pay (often referred to as net pay or net income) is the sum an employee receives after deductions from their gross pay, such as taxes and other withholdings. It represents the portion of their salary they ultimately take home.

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

How to work out take-home pay

In most instances, working out an employee’s take-home pay is fairly straightforward. It is the amount remaining once the following deductions have been applied:

Income taxes. The amount deducted for tax depends on several factors, including the employee’s level of income, any applicable tax credits, and the kind of tax involved (for example, federal, state, provincial, municipal, etc.).

Social security. In many jurisdictions, social security contributions are deducted; these may be based on salary level or set at a fixed rate.

Retirement/pension contributions. If an employee takes part in a pension scheme, contributions can be deducted from their gross pay.

Health insurance. Many employers provide health insurance and deduct the premiums from the employee’s pay. The precise amount depends on the level of coverage and the cost-sharing arrangement.

Other deductions. These might include additional withheld items, for example flexible spending accounts, union dues, or other voluntary deductions.

Bear in mind that employees with identical gross salaries can sometimes have differing take-home pay. This may result from a variety of additional factors, including:

• Commission and bonus payments
• Number of dependants
• Preferred tax arrangements (for example the W-4 form in the US)
• Court-ordered withholdings
• Additional income from other employment sources