How to Calculate Your Net Income
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If you’ve started a new position or are curious about how a potential job will pay out, you’re eager to learn how much you’ll get to walk home with at the end of each pay period.
Unfortunately, several considerations and factors go into determining your net income and your net worth. The answer isn’t so simple.
Once you’ve learned the details of your gross income, you won’t have to wait any longer to know your paycheck amount. With this easy step-by-step guide, you can calculate your net income yourself for all your budgeting and planning needs.
Start With Your Gross Income
The first step to calculating your net income is to start with your gross income. This is usually the number listed on the job posting or the pay rate negotiated in your contract when you signed it.
An important tip is to calculate your annual gross income, even if you’re paid weekly, biweekly, or monthly. For example, if you’re paid weekly, multiply the pay rate by 52 weeks to find your gross annual income. This makes it easier to subtract payroll deductions and taxes down the line, as these are usually expressed in annual terms.
Subtract Pre-Tax Deductions
Before you begin paying taxes, take out any pre-tax deductions you may have opted into, such as health insurance, 401(k)s, childcare expenses, commuter benefits, flexible spending accounts (FSAs), and health savings accounts (HSAs). These are usually offered by your employer.
Though employees aren’t required to participate in these workplace programs, it’s often best to do so because paying for them pre-tax means your taxable income will be lower.
Again, the terms of these deductions and how much your employer contributes to them should have been determined by your workplace HR department alongside your employment contract.
Deduct FICA Taxes
The next step is to deduct FICA taxes, which stands for the Federal Insurance Contribution Act of 1935. Under this act, working Americans are expected to subtract a portion of their pay to help contribute to Social Security and Medicare, public programs aimed at improving the country’s overall quality of life.
Because they’re a bedrock of public infrastructure, the US government mandates that FICA taxes take precedence over income taxes and be deducted first from gross pay.
Thankfully, FICA taxes aren’t as high as you might fear – the tax is split evenly between employer and employee. So, for example, if the FICA tax were 15%, you, as the employee, would only pay 7.5%, and your employer would pay the other 7.5%.
FICA tax rates change yearly, so check the IRS website for the most up-to-date information. For the 2022-2023 tax year, FICA tax rates were 15.3% total, comprised of 12.4% for Social Security and 2.9% for Medicare.
Calculate Income Tax
Next, we come to income tax withholding, often bemoaned as the most difficult part to calculate.
And it’s no wonder: your income tax rate depends on the amount of income you make, the state and locale you live in, your marital status, the number of dependents you claim, and whether you’re head of the household.
If you’re starting a new job, your employer should have asked for this information as part of your W-4 form, the Employee’s Withholding Certificate. It’s usually the employer’s duty to calculate, withhold, and pay your income tax come tax season, so not many average workers are familiar with the process.
Luckily, by consulting the tax brackets on the IRS’s website, you can determine your tax rate, find out if there have been any inflation adjustments, and calculate your federal income tax amount. Repeat this process for your state taxes, and research to see if your locale also requires any tax payments.
Alternatively, you could also use a Human Resource paycheck calculator to make these calculations for you.
Calculate Post-Tax Deductions
Next, calculate and deduct post-tax deductions such as Roth 401(k) contributions, union dues, disability insurance, charitable donations, and other non-tax-exempt fringe benefits.
Post-tax deductions are usually calculated either as a percentage of your annual paycheck or as a set dollar amount.
Additionally, you may have additional payments to make for court-ordered debt repayments, such as overdue taxes, alimony payments, or child support payments. Be sure to deduct these from your paycheck amount as well.
Divide By The Number Of Pay Periods
Now that you’ve made all your deductions, you’re left with your net annual income. All that’s left is to divide this number by the number of pay periods you have in a year to determine your net paycheck.
Remember the first step, when we multiplied your weekly, bi-weekly, or monthly pay rate to find your annual gross income? Divide your net annual income by the same number to get your net paycheck amount. In other words, this is the number you’ll see in your bank account at the end of each pay period.
You don’t have to be an accountant, HR professional, or payroll specialist to calculate your net income and net paycheck. By following these five easy steps, you can pull back the mystery from payroll, calculate your own net income, and take control of your budgeting.