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
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 deliveriesA second part-time jobSocial Security paymentsPassive income from rental propertiesInterest 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: $163.10Social Security tax: $119.23Medicare tax: $27.88State 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.
