Net Income (Take-Home Pay)

Every paycheck runs the same waterfall. It starts with gross pay, the wages or salary you earned in the period. Pre-tax deductions come off first: traditional 401(k) deferrals, health, dental and vision premiums paid through a cafeteria plan, and HSA or FSA contributions. Then taxes are withheld, then after-tax deductions such as Roth 401(k) deferrals, union dues or wage garnishments. What is left is deposited.

The order matters because pre-tax deductions don’t all shrink the same taxes. A 401(k) deferral lowers federal income tax but not Social Security and Medicare tax, which is still owed on the full wage. Health premiums and HSA contributions taken through a cafeteria plan escape both.

Only part of the tax is exact. Social Security and Medicare tax is a fixed 7.65% of covered wages, with the 6.2% Social Security part stopping at $184,500 in 2026. Income tax is withheld according to the Form W-4 you filed and the IRS tables, so each paycheck carries an estimate of your annual bill, not the bill itself. Over-withholding lowers take-home pay and comes back later as a refund; under-withholding raises it and leaves a balance due when you file.

Gross income is everything you earn before anything is taken out, the number on a job offer or a loan application. Taxable income is what the tax brackets apply to, after pre-tax contributions and deductions. Net income is what reaches your bank account, and it is the only one of the three you can spend. Economists call income after taxes “disposable income”, and what is left after necessities such as housing, food and insurance “discretionary income”.

Budgets built on gross pay go wrong quickly, because a sizable slice of salary never arrives: about a quarter of it in the example below. Rules such as the 50/30/20 rule divide take-home pay, not salary. Savings rate is where the two figures collide. A 401(k) deferral is saved before it ever reaches net pay, so dividing all your saving by take-home pay alone overstates the rate. A common fix is to divide total saving by take-home pay plus pre-tax saving, and to use the same base every time.

On a company’s income statement, net income is the bottom line: revenue minus the cost of goods, operating expenses, interest and taxes. The same idea applies to a sole proprietor, whose net profit on Schedule C is revenue minus business expenses. That profit, not revenue, is your earned income, but it is still figured before income tax.

Self-employed people have no employer withholding anything, so their take-home pay is only what they set aside correctly. Net profit is taxed by income tax and by self-employment tax of 15.3% on 92.35% of it, and half of that self-employment tax is deductible. Both are usually paid through quarterly estimated taxes, so a freelancer who spends every deposit can find that a large share of it was owed to the IRS. Many move a fixed share of each payment into a separate account the day it arrives.

Take-home pay moves with more than your salary. A raise is taxed at your marginal rate plus payroll tax, so a $5,000 raise in the 22% bracket adds about $3,500 to take-home pay before state tax, not $5,000. A bigger 401(k) deferral works the other way: each $100 deferred cuts take-home pay by only about $78 at the same rate. Passing the $184,500 Social Security wage base partway through 2026 raises every later paycheck by 6.2% of gross pay, and the 0.9% Additional Medicare Tax starts once wages pass $200,000.

In retirement the waterfall changes shape. Pensions, Social Security and account withdrawals pay no Social Security or Medicare tax, and income tax withholding on most of them is voluntary or adjustable, so what arrives depends on elections you make. Qualified Roth withdrawals are non-taxable altogether, so a Roth dollar reaches net income intact. Medicare Part B premiums, $202.90 a month for most people in 2026, are usually taken out of Social Security checks, so the deposit is smaller than the benefit. Planning retirement on gross benefits and withdrawals repeats the old mistake of budgeting on gross salary.