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Net vs. Gross Income Explained

Getting paid is a great feeling, but do you take the time to look at the details of your paycheck? To establish a sound budget, it’s important to understand your paycheck, starting with net vs. gross income. Depending on a variety of deductions, your take-home pay will vary from the total amount earned for any given pay period. These differences are represented by your net vs. gross income. Confusing the two could lead to unknowingly overspending or accumulating too much debt. So let’s break down net vs. gross income!

Net vs. Gross Income Explained

Similarly to understand the rest of your finances, it is important to understand the difference between net vs. gross income. Your paycheck may show a lower take-home amount than what you expect from your salary or hourly wage. Knowing the difference between the two will help when planning your expenses.

Gross Income

Gross income is a person’s total income earned before taxes and other deductions. Earned income includes salaries, wages, bonuses, tips, and self-employment income.

Net Income

Net income is a person’s income earned after deductions and taxes. In other words, net income is the percentage of take-home pay from each paycheck.

Statutory withholdings on a paycheck include:

  1. Federal Income Tax
  2. Social Security Tax
  3. Medicare Tax
  4. State and Local Income Tax

Additionally, there are other deductions that impact your net income that may include:

  • Health
  • Dental
  • 401k
  • Flexible- Dependent Care
  • Flexible-Medical

How you adjust your withholdings has a direct impact on your paycheck. Be sure to review the federal and state withholding forms and apply accordingly. The more money that is withheld from your paycheck, the smaller the paycheck. In contrast, the less money that is withheld from your paycheck, the larger the paycheck. Make the best use of your money, and have the right amount of tax withheld.

Want to learn more about net vs. gross income? Check out our net vs. gross income infographic!

Moreover, if you have any other questions about your finances, call the certified credit counselors at American Consumer Credit Counseling today at 1800-769-3571!

ABOUT AUTHOR / Madison

Madison is a Marketing Communications & Programs Associate at ACCC. She is excited to share her tips on saving money and being financially responsible here on the Talking Cents blog!

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