What is take home pay?

What does take-home pay mean?

Take-home pay (also called net pay or net income) is the amount left to an employee after deductions are applied to their gross pay, such as taxes and other withholdings. It denotes the portion of salary the employee actually receives.

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

How to work out take-home pay

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

Income tax. The amount withheld for tax depends on 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. In many jurisdictions, social security contributions are deducted. These may be calculated based on salary or set at a fixed rate.

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

Health insurance. Employers often provide health insurance and may deduct the premiums from the employee’s pay. The precise amount depends on the type of coverage and the cost-sharing arrangement.

Other deductions. This category covers any 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 receive different take-home pay. This can arise from a range of additional factors, for example:

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