There can be a substantial difference between gross income and take-home pay, or net income. Any taxes, insurance premiums or retirement deductions come directly out of gross income. Employees can see the exact amount of income and deductions by reviewing a current pay stub from their employer.
Gross income generally refers to what you make from your job before deductions. For example, if you earn $12.50 per hour and work 40 hours a week, the gross income figure on your weekly pay stub is $500. If you are paid bi-weekly instead of weekly, using the same hourly figures your paycheck shows $1,000 as gross income. Your gross income changes if you work overtime or work fewer than normal hours in a particular pay period. If you receive an annual salary instead of an hourly wage, your gross income is usually the same on each paycheck.
Taxes are the largest deduction that workers will typically see on their paycheck. Typical tax deductions include federal, state, Social Security and Medicare deductions. Depending on the city where you live you may also have a deduction for local taxes. Review each pay stub you receive to find out the total amount of taxes you are paying.
If your employer offers insurance benefits you may have paycheck deductions besides taxes, such as health, dental and vision premiums. Depending on your employer, your insurance deductions can help to reduce the amount of income taxes you have to pay at the end of the year. Another possible deduction is for a 401(k) plan. A 401(k) is a type of retirement savings plan that an employer may offer as an incentive to an employee. The money you put into your 401(k) goes into an investment account that is available to you when you retire. You will typically not pay taxes on the money you put into your 401(k) until after you retire and begin to withdraw the money from your account.
Net income is what you keep after taxes and non-tax deductions. Review your pay stub to make sure your net income is correct by subtracting all of your deductions from your gross income. The result should match the actual amount of your paycheck. This is your spendable income to use for covering your monthly expenses. The money left after paying your expenses is money you can spend or save as you wish. Keep your pay stubs to refer to whenever you need information on your income and deductions.
Jeff Todd, a former futures trader and banking and finance professional, started his writing career in 1997, producing content for The Motley Fool. He has since written for several trading websites and online media companies. He attended Wesley College, and received banking certificates from Louisiana State University and the University of Oklahoma.