Take-Home Pay

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DEFINITION of 'Take-Home Pay'

The money that an individual actually receives from working after employment taxes and the cost of benefits and retirement contributions are subtracted. Take-home pay is calculated by taking an individual's monthly gross income and subtracting federal income tax, Social Security and Medicare taxes, any state or local income taxes, monthly health and dental insurance premiums, 401(k) contribution and contributions to a flexible spending account. The money that remains is what an employee actually has available for expenses like paying the mortgage, buying groceries and paying for discretionary purchases.

BREAKING DOWN 'Take-Home Pay'

Because of all these payroll deductions, an individual's take home pay (or net pay) often differs significantly from their gross pay. When considering a salary offer for a job, raise or promotion, individuals should look at what their take home-pay, not their gross pay, will be. Similarly, when an employer extends a job offer, pay raise or promotion, he must consider that his true cost of having that employee is not just the employee's nominal salary, but also the matching portion of Social Security and Medicare taxes; contributions to the employee's health insurance premiums, retirement plan and any other benefits; pay for vacation days, sick days and personal days; and the employee's share of operating expenses (such as office space, equipment, utilities and parking).



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