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Gross vs. Net Income
Gross vs. Net Income
Your gross income is the total amount you earn before taxes and other paycheck deductions.
Your net income is what you bring home after deductions, this is the number you should use when creating your budget.
To help you understand your income this page will explain:
The three types of paycheck deductions
How to calculate your monthly net income using your pay stub
Common Paycheck Deductions
Common Paycheck Deductions
When you get your first pay stub it may not be clear where your hard earned money is going.
Most deductions fall into one of three categories:
- Pre-tax Deductions
These are subtracted before taxes are calculated. They lower your taxable income.
Health Insurance Premiums: Your share of employer-sponsored health insurance
Tax-deferred Retirement Contributions: Money saved for retirement in accounts like a traditional 401(k)
(these retirement contributions are taxed when withdrawn)
- Statutory Deductions
These are required by federal, state, or local governments.
Federal Income Tax: Helps fund services like national defense and infrastructure
FICA Tax (Federal Insurance Contributions Act): This funds Social Security and Medicare.
Social Security: Provides retirement income and disability benefits
Medicare: Funds healthcare for people 65 and older
State and Local Income Tax: Helps fund local government services
(varies by where you live)
- Post-tax Deductions
These are taken out after taxes are calculated.
Wage Garnishments: Court-ordered payments, such as for child support or debt
Roth Retirement Contributions: Money saved for retirement in accounts like a Roth 401(k) or Roth IRA
(these retirement contributions have already been taxed, and can be withdrawn tax free during retirement)
Calculating Net Income
Calculating Net Income
If you are a W-2 employee, which includes about 60% of U.S. workers, your employer automatically manages your paycheck deductions. This makes it easier to find your net income. Once you know your pay frequency (weekly, biweekly, or monthly), you can convert between pay periods to match your budgeting schedule.
For the remaining 40% who are self-employed or independent contractors, tax management works differently and is currently outside the scope of this website. You can learn more at the IRS Self-employed tax center.
Why Pay Frequency Matters
Your take-home pay might appear as weekly, biweekly, semi-monthly, or monthly.
Most budgeting systems work on a monthly basis, so converting your income to a monthly amount ensures accuracy and consistency in your plan.
The table below shows how to convert from different pay periods to monthly net income:
What's next?
What's next?
Now that you know your monthly net income, you’re ready to start planning how to use it.
Continue on to Budgeting Systems to learn about several popular budgeting methods.
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