Take-home pay is the pay that actually makes it home, once any deductions to your pay have been assessed. This may also be called net pay, and a yearly analysis of your pay may be referred to as net income for the year. It’s an important concept to understand because determining your ability to afford certain expenses should be personally based on take-home and not gross pay.
In the US, you will typically see certain deductions taken from your total paycheck. These can include deductions for state, federal and city taxes, deductions for disability pay and for social security, money paid to invest in your 401k, and health insurance payments — when your company offers insurance. Other deductions may include money paid to health savings programs, and money paid for child support, alimony or back taxes. These will all reduce your total take-home pay.
Credit card companies and mortgage companies or rental agencies typically assess your income by gross pay. If you’re looking to rent an apartment, the owner of the apartment may determine that they will only rent to people whose gross pay is at least three times the rent. Yet, since your take-home pay is reduced, you could end up dedicating more than half the money you earn to pay the rent, which may really be out of your price range if you have other large expenses to meet. Instead, you should look for an apartment that costs roughly one third of your take-home pay, rather than gross pay.
When you apply for help from charitable organizations, for low-income housing, or to obtain government medical programs or financial support, assessment of your income is usually not based on take-home pay but gross pay. For many this poses a problem, since much of that pay may be dedicated to the payment of things like taxes and it may not really represent your income. You may try to argue this point, but most social services in the US are based on your total salary, and it’s very hard to win this argument.
If you work as an independent contractor, you do have to think about your salary and how it relates to take-home pay. Though you technically take home your whole payment for a job, a day, or an assignment, you should not consider yourself fully entitled to it. Depending upon what you make, you will need to remove payments to meet your tax obligations, social security payments, and the like. It can be very tempting, especially in tough economic times to use the full amount you make, but this will only land you with a bill for taxes at the end of the year, which you might not be able to meet.
Consult your local government agencies to determine the appropriate deductions for the salary you make. You can either make quarterly tax payments in advance, based on this amount, or you can stick that money in a savings account to settle up at the end of each tax year. Either way, do realize that not all the money you make is yours to enjoy, and plan accordingly.