Take-Home Pay Definition
Take-Home Pay refers to the net amount paid to the employees after the deduction of contributions like retirement account contributions, premium on insurance, social security and medicare contributions, benefits and taxes from the Gross Pay.
How to Calculate Take-Home Pay?
For calculating take-home pay, the following strides need to be followed-
- Calculation of Annual FICA Taxes: Contribution to social security and medicare is your FICA taxes. These taxes are reduced from gross pay as a deduction. Any person generating income in the U.S. gets a deduction of a flat rate which increases or decreases based on inflation. This flat rate of deduction allowed on gross pay in 2020 is 7.65% up to earnings of $137,700. Thus, we can deduct this percentage of deduction from the gross pay before entering into further calculation.
- Deduction of Personal Exemptions: IRS provides you with the right to deduct personal exemptions before providing for further calculation of income tax. This rate of the deduction varies on year to year basis. To account for accurate computation, you need to acknowledge the current rate deductions applicable. Deduce current rate of deduction with whatsoever your gross income is for the said year.
- Reduce Standard Deductions: The standard deduction is allowed based on the tax filing status of the person like married, single, etc. Also, it varies every year. To know the deduction rate applied current year, you can refer to the IRS website before reducing such amount from gross pay.
- Inferring Income Tax Framework: After subtracting personal exemptions and standard deductions, you can indicate taxable income. This taxable income will determine your federal and state taxes. To acknowledge the tax bracket in which you fall, you can visit the websites of the government.
- Calculation of Federal, State, and Local Taxes: Depending upon the tax bracket you fall in, federal, state, and even some other local taxes may apply. Federal taxes also relies on the tax filing status you possess.
After subtracting, income tax, FICA deductions, and other deductions as illustrated above from your gross income, the rest is take-home pay.
Nisha who has been filing the tax return in the status of single agreed for a job offer at a specific designation in a company. They are appointing her at $15 per hour having a total work of 35 hours per week. She had taken health protection and pays a premium of $40 a week, this payment is exempted in income tax withholding and also under FICA. With the other details provided below, calculate her take-home pay?
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- Gross pay for the week = $15 x 35 hrs = $525
- Now, subtract deductions of health insurance premiums from gross wages.
- After deducting the above figures, we will calculate FICA taxes from the above-deducted figure-
FICA taxes = 7.65% x $485 =$37.10
- Federal income tax is provided as per filing status, since, Nisha is within the single bracket with zero claims, $63 per week is the federal tax.
- Nisha lives in Arizona, where employees can decide their desired percentage to go towards state income tax. So, let us suppose she chose 2.5%. Hence,
State Income Tax = $485 x 2.5% = $12.13
- Since local income tax does not apply to all the states, we can suppose here that no local tax is to be paid.
Now, let us calculate the take-home pay –
Take-Home Pay = Gross Pay – Deductions (FICA, federal, states, other local taxes, and health insurance premiums)
- =$525- $40 -$37.10 -$63 -$12.13 -$0
- =$372.77 per week
Hence, in the above example, net pay is $372.77.
How to Maximize Your Take-Home Pay?
There are certain ways by which you can maximise your take-home pay. We have mentioned some of them below:
- Keep an eye on your Withholdings: This is a quick and common way to maximise your home pay as you must consider the amount you should pay to the taxman before making the payment. W-4 is a form which each employee uses to fill while starting for a job. You can claim more and more personal exemptions so that taxes reduce proportionately.
- Monitor your Payroll Deductions: If you are a healthier person and always consider a routine medical check-up, then you can look for an insurance provider who would take a lesser premium. It will increase your home pay to a certain amount.
- Overtime Work: If your working organisation has a provision to pay for overtime, then you can work extra to receive extra.
- Request for Increment: Most of the organisation reviews the performances of the employee from time to time and then provide for salary increment. So if you work harder, then you may get an increase in your earning.
- Look for a Side Job: If your office doesn’t pay for overtime or not allowing increment, then you may look for a side job so that you will get a higher take-home pay.
This article has been a guide to Take-Home Pay and its definition. Here we discuss how to maximise and how to calculate it along with examples. You may learn more about financing from the following articles –