What is take home pay?

What is take-home pay?

Take-home pay (often called net pay or net income) is the amount an employee actually receives after deductions such as taxes and other withholdings have been taken from their gross pay. It represents the portion of their salary they can take home.

The amount of take-home pay can vary markedly depending on where the employee lives and how much they earn.

How to calculate take-home pay

Usually, working out an employee’s take-home pay is straightforward. It’s what remains after you subtract the following deductions:

Income taxes. The amount withheld varies according to several factors, including the employee’s income level, any applicable tax credits, and the tax jurisdiction (for example, federal, state, provincial or municipal).

Social security. Many countries require social security contributions to be deducted. These may be calculated as a percentage of salary or set at a fixed rate.

Retirement/pension contributions. If an employee contributes to a retirement savings plan, amounts may be deducted from their gross pay.

Health insurance. Employers commonly offer health insurance and may deduct premiums from an employee’s pay. The exact deduction depends on the level of coverage and how costs are shared.

Other deductions. This category covers additional withholdings, such as flexible spending accounts, union dues, or other voluntary deductions.

Bear in mind that employees with the same gross salary can still have different take-home pay. This can result from a range of additional factors, for example:

• Commissions and bonuses
• Number of dependents
• Preferred tax arrangements (for example, elections made on the W-4 form in the US)
• Court-ordered withholdings
• Additional income from other sources of employment