What is the difference between gross income and net income?

Gross income is your total earnings before any deductions, such as taxes, insurance, or retirement contributions. Net income, also known as take-home pay, is the amount you actually receive after all these deductions have been subtracted. Net income is the figure you should use for budgeting.

How do I calculate my net income?

To calculate your net income, start with your gross pay and subtract all mandatory deductions (federal, state, and local income taxes, Social Security, Medicare) and all voluntary deductions (health insurance premiums, 401(k) contributions, HSA contributions, etc.). The remaining amount is your net income.

Why is net income more important than gross income for personal finance?

Net income is more important because it represents the actual money you have available to spend, save, and invest. Budgeting or planning based on gross income can lead to overspending and financial shortfalls, as it doesn't account for the significant portion of your earnings withheld for taxes and other deductions.

What are common deductions that reduce my gross income to net income?

Common deductions include federal income tax, state income tax (if applicable), local income tax (if applicable), Social Security tax (6.2% as of 2026, up to a limit), Medicare tax (1.45% with no limit), health insurance premiums, and contributions to retirement accounts like 401(k)s or HSAs.

How can I increase my net income?

You can increase your net income by optimizing your tax withholding (e.g., adjusting your W-4), maximizing pre-tax contributions to accounts like 401(k)s and HSAs, taking advantage of employer benefits and perks that reduce out-of-pocket expenses, and exploring additional income streams or side hustles.

What is a good percentage of net income to save?

Financial experts often recommend saving at least 15-20% of your net income for retirement and other long-term goals. Additionally, building an emergency fund of 3-6 months' worth of essential living expenses from your net income is a crucial first step.

Should I aim for a large tax refund?

No, a large tax refund means you overpaid your taxes throughout the year, essentially giving the government an interest-free loan. It's generally better to adjust your tax withholding (Form W-4) so that your refund is small, or you owe a small amount, maximizing your net income available to you throughout the year for budgeting, saving, or investing.

Net Income: Your Personal Finance Guide | One Percent…