What Is Net Income?

How Net Income Works

If you’re an employee at a company, you might bring in the same amount of money each week, or different amounts depending on how many hours you worked. Either way, the amount of money you earn is not what you’ll actually get paid. If you only have one job where you earn $60,000 per year, that’s your gross income, or the money you receive before taking out any deductions.

In comparison, your net income is your income minus any taxes, benefits, and pretax contributions. Your net income is a more accurate reflection of how much money you have available to spend. Once you know your net income, you can use that information to create a monthly budget and pay for living expenses.

Example of Net Income

When you’re hired for a new job, you may sign on for an agreed-upon annual salary. If you earn $60,000 per year, that works out to roughly $5,000 per month. However, when you receive your weekly or biweekly paychecks, you may notice that they add up to less than $5,000. Your paystub will outline how much you paid in taxes and benefits and what your take-home pay is.

Gross Income vs. Net Income

To figure out your net income, start by calculating your gross pay. Your gross pay is the total amount of money you earn before paying taxes. If you’ve ever heard someone refer to how much money they earn in a year, they’re usually talking about their gross income.

Determine your gross income by adding up your various income sources. If you’re salaried and just have one job, determining your gross income might be fairly simple. But you might have multiple income sources, including:

• A side hustle like freelancing or doing DoorDash deliveries
• A second part-time job
• Social Security payments
• Passive income from rental properties
• Interest earned on investments or interest-bearing accounts

Once you’ve calculated your gross income, subtract federal and state taxes, benefits, and pretax deductions. The money you receive after deductions are taken out is your net income.

Let’s say Sarah earned an annual salary of $50,000 in 2022. Because her company pays her every other week, her gross biweekly paycheck was $1,923.08. Sarah lives in Colorado and is single, so she also has to pay the following taxes:

• Federal income tax: $163.10
• Social Security tax: $119.23
• Medicare tax: $27.88
• State income tax: $87.50

After paying taxes, Sarah has a net income of $1,525.37 per paycheck. That’s assuming she hasn’t put any money toward retirement or employee benefits.

Frequently Asked Questions (FAQs)