What is take home pay?

What does take-home pay mean?

Take-home pay (also known as net pay or net income) is the amount an employee actually receives after deductions are made from their gross salary, such as taxes and other withholdings. It represents the portion of their pay they can take home.

Take-home pay can differ significantly depending on where an employee lives and how much they earn.

How to work out take-home pay

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

Income taxes. The tax deducted will vary according to factors such as the employee’s level of earnings, any tax credits they qualify for, and the tier of taxation (for example federal, state, provincial or municipal).

Social security. In many jurisdictions, social security contributions are deducted. These may be calculated as a percentage of salary or charged at a fixed rate.

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

Health insurance. Many employers provide health insurance and recover the premiums through payroll deductions. The exact amount depends on the level of coverage and how costs are shared.

Other deductions. Other payroll deductions can include items such as flexible spending accounts, union dues or other voluntary withholdings.

Bear in mind that employees with the same gross salary can still receive different take-home pay. This can be caused by a number of additional factors, including:

• Commissions and bonuses
• Number of dependants
• Chosen tax arrangements (for example, as declared on a W-4 form in the US)
• Court-ordered withholdings
• Additional earnings from other employment