What is 'Take-Home Pay'

Take-home pay is the net amount of income received after the deduction of taxes, benefits, and voluntary contributions from a paycheck. It is the difference between the gross income less all deductions. Deductions include federal, state and local income tax, Social Security and Medicare contributions, retirement account contributions, and medical, dental and other insurance premiums. The net amount or take-home pay is what the employee receives. 

BREAKING DOWN 'Take-Home Pay'

The net pay amount located on a paycheck is the take-home pay. Paychecks or pay statements detail the income activity for a given pay period. Activity listed on pay statements include earnings and deductions. Common deductions are income tax and Federal Insurance Contributions Act (FICA) withholdings. There may also be less standard deductions such as court-ordered child support or alimony, and uniform upkeep cost. The net pay is the amount remaining after all deductions are taken. Many paychecks also have cumulative fields that show the year-to-date earnings, withholdings, and deduction amounts.  

Gross pay is often shown as a line item on a pay statement. If it is not shown, you may calculate it using either the annual salary divided by the number of pay periods, or multiply the hourly wage by the number of hours worked in a pay period.

For example, a bi-monthly paid employee earning an annual salary of $50,000 will have gross pay of $1,923.08 ($50,000/26 pay periods).  

Significance of Take-Home Pay vs. Gross Pay

Take-home pay can differ significantly from the gross pay rate. As an example, an hourly-waged employee making $15/ hour and working 80 hours per pay period has a gross pay of $1,200 (15 x 80 =1200). But, after deductions the employee's take home pay is $900, the employee is actually earning $11.25/hour as a take-home rate (900/80=11.25).

As seen, this employee's take-home pay rate differs significantly from the gross pay rate. Many credit rating and lending agencies will consider take-home pay when loaning money for large purchases, such vehicles, and property.

RELATED TERMS
  1. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  2. Above The Line Deduction

    An above the line deduction is an item that is subtracted from ...
  3. Payroll Deduction Plan

    A payroll deduction plan refers to when an employer withholds ...
  4. Tax Deduction

    A tax deduction is an allowance that lowers a person’s tax liability ...
  5. Pay As You Earn (PAYE)

    Pay As You Earn (PAYE) refers either to a system of income tax ...
  6. Business Interest Expense

    Business interest expense is the cost of interest that is charged ...
Related Articles
  1. Managing Wealth

    Save $1,000/Mo. in Your 401(k) for Less

    Saving $1,000 per month in your 401(k) will actually cost you only $700. Here's how it works.
  2. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  3. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  4. Taxes

    Insurance-based Tax Deductions You May Be Missing

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  5. Taxes

    Increase Your Tax Refund With Above-The-Line Deductions

    Find out about these deductions and how you can use them to lower your tax bill.
  6. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  7. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  8. Taxes

    The Most Overlooked Tax Deductions

    The receipts you cram into your wallet could be replaced with cash come tax season.
  9. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center