Why this topic should interest you?

Many people know what their gross income is, but that is rarely the amount of money they take home. Knowing your salary, take home pay, and the reasons why the two differ can prove helpful in successfully managing your personal finances.

Gross Income

This is the number you knew when you had your first part-time job at insert name of first job here making $5.50 an hour, and the number you will know when you land that big full-time job with a $45,000/year salary. In other words it is what you make before any deductions, like taxes and benefits.

Net Income

When you start a new job and get the first paycheck this is the number that usually makes you go WTF?! I thought I was making more than that! It is your gross income less any deductions, like taxes and benefits. It is the final number you see on your paycheck or the number that is directly deposited into your bank account, it can be referred to as your take home pay.

It is important to note that this number can differ significantly from person to person even if their gross income is the same; this is due to differences in deductions.

Deductions

These are items like federal and state taxes and are subtracted from your gross income.

Example

Below is an example of a monthly paycheck, as you can see gross income is $1,875.00 but take home pay is only $1,445.07, this is because of the deductions that occur before the check even reaches your bank account (+ denotes income, – denotes deduction)

+ Monthly Salary (Gross Income)           + 1,875.00

+ Flex Benefits Credits                 + 188.24

– Federal Taxes                             – 308.60

– State and Local Taxes                – 0.00

– Before Tax Deductions               – 309.57

– After Tax Deductions                  – 0.00

= Net Income (Take Home Pay)             = 1,445.07

Now that you are familiar with the difference between gross and net income my next few posts will dig into the different types of deductions above and explain what they are and how they affect your paycheck.