How to Calculate Your Take-Home Salary in the US
When accepting a new job, one of the most important calculations you need to do is to find what your new take-home salary may be.
This is often different from the advertised payable salary. Your take-home salary is the figure that you have available each month after your deductions have been made.
These deductions may include tax payments, pension contributions, health care insurance and other employee benefits or student loan repayments.
When added together, they can be a sizeable amount of your gross salary.
Your paycheck will likely detail all the relevant deductions. But it is good practice to know how to calculate your take-home salary before you start a new job so that you do not have any surprises on payday.
Why Do You Need to Be Aware of Your Take-Home Salary?
When starting a new job (especially one with an improved salary), it can be tempting to mentally spend the increased pay packet. After all, a new job deserves a treat.
But before you reach for your credit card, you should check that you can afford that new luxury item.
This is because job descriptions often advertise a gross salary rather than a net salary.
A gross salary is the overall amount paid before any deductions are made. It is often a significantly higher amount than your net salary – also known as your take-home pay.
Your take-home pay can be affected by a variety of factors and, as you rise the career ladder, you may find that your outgoings change.
For example, your tax payments may increase or you may need to pay bigger contributions to your pension and healthcare insurance.
These changes may reduce your expected pay rise significantly.
It is important to understand what to expect from your monthly paycheck in advance. This is so you can easily identify and rectify any potential errors. It also means that you can be more aware of your financial position and be aware of what disposable income you could expect to have.
If you are entering into contract negotiations, you can use this knowledge to your advantage, helping you to negotiate a better deal for your lifestyle.
What Are the Factors That Could Impact Your Take-Home Pay?
In the US, salary negotiations are complicated by the fact that different states have different laws.
You may be working in a role for a national company and be relocated to an identical role elsewhere but find that your pay has changed.
It is, therefore, prudent to be aware of the political and societal factors that could impact your take-home pay.
What Are the Minimum Wage Requirements in Your State?
Regardless of what job you do, you should pay attention to the minimum wage requirements.
As well as a federal minimum wage of $7.25 per hour, some cities and states have their own distinct minimum wage laws.
The minimum wage is designed to ensure that you have a decent standard of living. When checking your paycheck for your take-home wage, it is important to ensure that your employer has adhered to this legislation.
Is Your Employment Status Classed as Exempt or Non-Exempt?
You also need to be aware of whether you are classed as exempt or non-exempt.
This clarification will confirm if you are entitled to overtime pay or not. If you are exempt, it means that regardless of how many hours you do, you will not be paid anything extra as you are paid by the task, rather than the number of hours worked.
This can make a big difference to your take-home pay, so you must ensure that you are aware of your employment status as part of your calculations.
Do You Have a Paid-Time-Off Policy?
Some employers offer lower salaries, but in its place offer a paid time off policy.
This means that your vacation, sick leave and personal days are combined into one group. You are then entitled to use your time off at your discretion in a way that suits you.
If you are concerned that your take-home pay is lower than expected for a potential new job, you should clarify the employee benefits.
Many workers are happy to trade off their take-home salary for a job that allows them paid time off, especially if it is an unlimited PTO policy.
Do You Work Full Time or Part Time?
You also need to confirm if you are classed as a full-time or part-time employee.
This is an important distinction because it can impact a variety of aspects, from overtime payments through to eligibility for the Affordable Care Act (also known as Obamacare).
There is no federal mandate as to what constitutes part-time or full-time working hours; it is up to the discretion of the employer. Therefore, you need to confirm with your HR department what your employment status is deemed to be.
Are You a Salaried Employee?
This can also have a big impact on your take-home pay.
This is because salaried employees are typically classified as ‘exempt’ and, as such, will not be eligible for any overtime payments.
Whilst on paper, you may be technically earning a higher salary than non-exempt co-workers, the reality can be quite different when you receive your paycheck each month.
How Many Paydays Will You Have Per Month?
Your payment schedule will also impact how much your take-home salary will be each month.
Some employers may pay bi-weekly – in which case, you will receive 26 paydays per year. Others will pay semi-monthly on the 1st and 15th of the month – giving you 24 paydays per year.
This is another thing to clarify with your HR department as it will allow you to set your expectations.
What Personal Deductions Do You Need to Pay?
The final aspect to think about is your personal deductions.
These can include:
- Your contributions towards FICA (the Federal Insurance Contributions Act)
- Your tax filing status (whether you a single or married)
- Your number of personal exemptions (if applicable
- Your tax payments (broken down into federal, state and local tax brackets)
You should also consider what you are paying into your retirement plan, any health or life insurance contributions, as well as any union fees or professional memberships.
How to Calculate Your Take-Home Salary
With all of this in mind, it can be extremely confusing to know what to expect from your first paycheck. To help, here is a brief overview of how you can calculate your take-home salary:
Confirming Your Pre-Tax Contributions
Before you reach your taxable income, you need to subtract any pre-tax contributions:
1. Calculate Your FICA Contribution
Your first step to calculating your take-home salary is to identify what your FICA contribution is.
This is the money paid to Social Security and Medicare. This is a flat-rate deduction and each year the amount changes following inflation.
For 2021, the FICA tax rate for both employers and employees is 7.65%. This is broken down into 6.2% for Social Security and the remaining 1.45% for Medicare.
You should subtract your gross salary by 7.65%. This reduced amount is then the basis for all additional calculations.
2. Confirm Your Number of Personal Exemptions
When you start a new job, you will be asked to complete a W-4 form. This is a document that tells an employer how much federal income tax they need to withhold from your paycheck.
There are a variety of allowances available within the W-4 form, such as childcare expenses or whether you are claiming you have dependents.
You should regularly check your W-4 form as your personal circumstances can change at a variety of times, not just when you start a new job.
Paying close attention to your W-4 form can prevent you from being landed with an unexpected tax bill. The IRS has a tax withholding estimator that can help you to confirm your details.
Once you know what your exemptions are, you can deduct these from your gross salary.
3. Make the Most of Standard Deductions
The IRS will let you make standard deductions rather than detail itemized deductions on your tax bill. You can choose to file as a single person, a married person or the head of a household.
Your choice of standard deductions or itemized deductions can reduce your taxable income.
If you itemize your deductions, you can include the interest on your home mortgage payment, as well as charity donations or medical expenses. However, you need to keep stringent records in case you are audited by the IRS. This is why many choose to rely on standard deductions.
There are different rates available depending upon your filing status:
|Married – Filing independently||$12,400||$12,550|
|Married – Filing jointly||$24,800||$25,100|
|Head of household||$18,650||$18,800|
Once you have subtracted your FICA contributions, personal exemptions and standard deductions from your gross salary, you will have a figure which is your taxable income.
Do Not Forget Other Pre-Tax Deductions
You may have additional deductions that should be considered as well. For example, contributions towards a 401(k) retirement plan are often factored in as part of a pre-tax deduction.
Similarly, health insurance payments are also a pre-tax deduction and should be subtracted from your gross pay before confirming your taxable income.
If you pay for any union fees or professional memberships, your HR department should confirm whether these should be pre or post-tax deductions.
Your Taxable Income
Now you have discovered your taxable income, you need to subtract any federal, state and local taxes.
The amount of federal tax that you must pay will depend on your filing status and your tax bracket.
You can find out your tax bracket on the Tax Foundation website.
Your state tax will be calculated individually by each state.
If you have relocated for a new job (even if it is a similar role within the same company), the changes in state tax may see a difference in your take-home salary.
You should pay close attention to your state tax contributions, which will be listed on your state’s official website.
The Tax Foundation has a detailed resource center that will help you to understand your state tax requirements.
Once you have confirmed your federal and state tax requirements, you can add them together. This will confirm your tax payments over a year.
How to Make Your Final Calculation
By now, you should be aware of how to calculate your final take-home salary.
Here is a breakdown of the calculation:
Take your Annual Gross Pay figure
minus FICA contributions
minus personal exemptions and standard deductions
minus any 401(k) contributions or health insurance premiums
equals Annual Taxable Income
Annual Taxable Income
minus annual federal/state taxes
equals Annual Net Pay
Annual Net Pay
divided by total number of pay periods in a year
equals an estimate of your Take-Home Salary
Although this calculation provides a basic estimate of what you should expect from your take-home pay, the reality is that there are far more nuances that should be considered.
- Is your income heavily dependent upon tips? If so, how does this impact the minimum wage implications?
- How much overtime will you be expected to do?
- Are you willing to accept a lower financial payment in exchange for more generous employee benefits, such as an unlimited PTO policy or more comprehensive health insurance?
Misunderstanding these intricacies could mean that you find yourself working more hours for less take-home pay.
Working out your take-home pay can be incredibly complicated, which is why there are numerous online calculators available that are there to help you understand how much you should expect to take home each month.
It is highly recommended that before you accept a new job, you take the time to consider what your new take-home salary is.
Not only can it help you to identify if it is a financially advantageous career move for you, but you can use the information as leverage during any contract negotiations.
Similarly, once you have started your new job, having an idea of how much you should expect to receive in your paycheck will allow you to identify and rectify any mistakes promptly.