Gross vs. Net Salary

Your gross pay is the amount that you are paid before taxes and other deductions are taken from your paycheck. Your net pay is what you have leftover after taxes and deductions.

Understanding your gross pay vs. your net pay is an essential component of financial literacy. You will be provided with a gross salary when you take a job. Some people are surprised when they get their first paycheck and realize that the net pay is substantially less than what they expected based on the gross pay amount.  When you are making plans about budgeting your salary, be sure you are using your net salary.

                                               Gross Net
A person's total income  before taxes and other deductions A person's income earned after taxes and deductions

Earned income includes

  •        Salaries     
  •        Wages           
  •        Bonuses          
  •        Tips           
  •        Self-employment income

You should be using your NET income to be making budgeting decisions. 

Statutory withholdings on a paycheck include

  •        Federal income tax
  •        Social security tax
  •        Medicare tax
  •        State and local income tax

There are other deductions that may impact your net income that may include

  •         Health
  •         Dental
  •         401(K)
  •          Flexible-dependent care
  •          Flexible- medical

 

Take a look at the example below. Notice the difference between this employee's gross and net pay. Aside from taxes, what other types of deductions do you see being taken out of their gross pay? You will notice that some of these deductions are actually quite beneficial to the individual (health insurance, retirement). It is recommended that as you begin to think about salary and hourly pay ranges that you subtract 30% from the gross offer to get to a reasonable net pay range. This will help you make better choices when thinking about your budget and how much you can afford to spend on things.

 

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With a firm grasp on your gross vs net pay you can now start to think about how you will need to budget your net pay so that you are successful financially.