The term "take-home pay" is a concept you need to understand as employees and business sector members.
Your agreed-upon salary is your gross income when you accept a job offer. Your take-home pay, also known as net wages, is the sum of your earnings after all tax deductions have been taken into account, whereas gross pay is the whole amount you are paid each week before tax deductions.
The term is hardly often heard by people and is yet seen as unusual. In this article, we'll define take-home pay and explain how to calculate it.
What is Take-home Pay?
Take-home pay is the remaining income after taxes, benefits, and any additional contributions have been taken out of a paycheck. It is the difference between gross income and everything deducted from it. Taxes on federal, state, and municipal income, Social Security and Medicare contributions, contributions to retirement accounts, and health, dental, and other insurance premiums are all deductible. What the employee receives is known as take-home pay or net pay.
Take-home Pay Vs. Gross Pay
Take-home pay is shown as the net pay amount on a paycheck. Checks or pay statements describe the income activity for a specific pay period. Earnings and deductions are reported on pay statements as activity. Federal Insurance Contributions Act (FICA) and Income tax withholdings are frequent deductions. Additionally, there can be fewer regular deductions for recurring maintenance costs and court-ordered child support or alimony. The amount left over after all deductions have been made is known as the net pay. Additionally, many paychecks feature cumulative fields that display the totals for the year's earnings, withholdings, and deductions.
Gross pay is commonly shown as a line item on a pay statement. If it is not stated, you can calculate it by dividing the annual revenue by the number of pay periods or by multiplying the hourly rate by the number of hours worked in a pay period.
For instance, an employee who is paid bimonthly and receives an annual salary of $50,000 will earn a gross salary of $1,923.08 ($50,000/26 pay periods).
How to calculate Take-home pay?
To calculate your take-home pay, follow the following five steps.
Calculate your FICA taxes for the current tax year
FICA represents your Social Security and Medicare contributions. In the United States, a flat-rate deduction is applied to all earned income; in 2020, it was 7.65 % of wages up to $137,700, and it will rise annually in line with inflation. Therefore, before performing further calculations, you might minimize the cost by deducting this percentage from your yearly gross pay.
Subtract personal exemptions
The IRS deducts personal exemptions from your income before calculating your tax. From year to year, the rate does not always remain constant. To conduct precise calculations, you must ascertain the current exemption rate.
Subtract Standard deduction
The standard deduction depends on how you file your taxes (i.e., single, married, etc.) Every year, this deduction is different. Before deducting a sum from your gross income, you can check the IRS website to see the current rate.
Determine your tax bracket
After subtracting a standard deduction and any personal exemptions, you'll have a good idea of your taxable income. The total determines your federal and state tax brackets.
The bracket tables are updated annually by the Tax Foundation. For the most recent details, go to their website. Since each state determines its tax rates, you will need to research your state's tax rate on its official website.
Calculation of Federal, State, and Local Taxes:
Federal, state, and even some other local taxes may be applicable, depending on the tax bracket you are in. The status of your tax file also affects your federal taxes.
Your take-home pay is determined by deducting income tax, FICA deductions, and other expenses from your gross income.
Example
To guide you in calculating your take-home salary, consider the following example:
John has no claims on her W-4 form and is filing as a single individual. He accepts a job offer from a company that will pay him $15 an hour. He has to put in 35 hours a week. As a result, his total gross income for each pay period is $525 ($15 multiplied by 35 hours).
John receives health benefits and makes a $40 weekly insurance premium payment. Social Security, Medicare, and income tax withholding are not applied to health benefits. By calculating his deductions, you can calculate his take-home pay:
- Subtract any pre-tax deductions: From the employee's gross pay, such as health insurance premiums. $525 - $40 = $485.
- Determine the FICA tax. The employee's pay after pre-tax deductions is multiplied by 7.65 % to determine how much goes toward FICA. The FICA tax that needs to be deducted from the employee's gross pay is $485 x 0.0765, or $37.10.
- Determine your federal income tax.
The federal income tax for a single filer with no claims in 2018 is $63 per week based on the age bracket.
Determine the state income tax.
In Phoenix, Arizona, where John resides, workers can choose what portion of their gross income goes toward state taxes. He decided on 2.5 percent. To calculate the state income tax withholding, multiply $485 by 2.5 %t: $485 x 0.025 = $12.12.
- Calculate local income tax. However, not all states have municipal income taxes, and in the case of this example, Phoenix does not.
By deducting all computed deductions from the gross salary or by applying the following formula, determine the take-home pay:
Gross pay fewer deductions equals net compensation (FICA tax; federal, state, and local taxes; and health insurance premiums).
John's situation:
Gross pay: $525
The cost of health insurance is $40.
Federal income tax = $63
FICA tax$ = 37.10
State income tax$12.12
Local income tax = 0 dollars
Net salary is calculated as follows: $525 - $40 - $37.10 - $63 - $12.12 - $0 = $373.78, or $372.78 for a 35-hour workweek for John.
You are now able to calculate take-home pay. Ensure you don't leave out any details to prevent miscommunication between the company and employees.
