What is Net Income?

Net income is what is left of your pay after taxes and payroll deductions come out. It is the number that actually lands in your bank account, which is why it is also called take-home pay. Gross income is what you earn; net income is what you keep.

The distinction matters because the two numbers are far apart. A $90,000 salary is gross. Depending on your tax situation and what comes out of your paycheck, what actually reaches your account might be closer to $57,000.

Gross Income vs. Net Income

Gross pay is what you earn before anything is withheld: salary, wages, and bonuses. Net income is that figure minus the taxes and deductions taken out of it.

On a tax return, “gross income” is wider than gross pay: it also picks up interest, dividends, and self-employment income. Box 1 of your W-2 is narrower than both, since it already excludes pre-tax amounts like traditional 401(k) contributions and cafeteria plan premiums, which is why it is usually lower than your salary. This article uses the paycheck sense throughout.

Lenders usually qualify you on gross pay, which is part of why people end up approved for mortgages they cannot comfortably carry. Your budget runs on the net number.

How to Calculate Net Income

For an individual, start with gross pay and subtract what comes out of it:

Net income = gross pay - taxes - payroll deductions

The subtractions typically include federal income tax withholding, state and local income tax, Federal Insurance Contributions Act (FICA) payroll taxes, health insurance premiums, and pre-tax retirement contributions such as a 401(k).

The two halves of FICA behave differently. Social Security takes 6.2% and stops once your wages reach the annual wage base, which is $184,500 for 2026. Medicare takes 1.45% with no cap at all, plus an additional 0.9% on wages above $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately. Below the wage base the combined rate is 7.65%; above it, only the Medicare portion continues.

Take someone earning $90,000 who contributes $9,000 to a 401(k) and pays $3,600 in health premiums. Roughly $9,900 goes to federal withholding, $6,610 to FICA, and $4,000 to state tax. Net income is about $56,890, or $4,741 a month.

The FICA figure is charged on $86,400 rather than the full salary, because pre-tax health premiums reduce FICA wages while 401(k) contributions do not. The withholding figures depend on filing status, state, and W-4 elections, so treat them as illustrative rather than as a calculation you can apply directly.

One point that trips people up: rent, groceries, and car payments are not subtracted when calculating net income. Those are expenses you pay out of net income. Subtracting them gives you discretionary cash flow, which is a useful number but a different one.

Net Income for a Business

The term means something related but not identical in business accounting. There, net income is the bottom line of an income statement: revenue minus cost of goods sold, operating expenses, interest, depreciation, and taxes. It is the profit figure that flows into earnings per share.

The shared idea is what remains after all the required subtractions. Which subtractions those are depends on which sense of the term is in play.

Why Net Income Drives Your Plan

Two numbers depend directly on it. Your savings rate is usually calculated against income, and whether you use gross or net changes the answer by a wide margin. Someone with $90,000 gross and $57,000 net who saves $14,000 a year has a 16% savings rate measured one way and 25% measured the other, and those two figures imply very different retirement dates.

Your cash flow, the money available after fixed costs, starts from net income rather than salary. Planning against gross consistently overstates capacity by whatever your combined tax and deduction rate happens to be, which for most earners falls somewhere between a quarter and a third of the headline number.

Frequently Asked Questions

Is net income the same as take-home pay? For an individual, yes. Both describe what remains after taxes and payroll deductions. Business accounting uses the term differently, for company profit after all expenses.

Does net income include 401(k) contributions? No. Pre-tax 401(k) contributions come out before you receive the money, so they reduce net income even though they are still your money. This is why someone contributing heavily can have a modest net income and a strong financial position at the same time.

Should I budget on gross or net income? Net. Gross income includes money you never see. Building a budget on it consistently overstates what you can spend by whatever your effective tax and deduction rate happens to be.

Why is my net income lower than I expected? Usually the combination rather than any single line. Federal and state withholding are typically the largest deductions, and FICA adds a further 7.65% that no credit or itemized deduction reduces. Health premiums and retirement contributions account for much of the rest, and because those come out before the money reaches you, a large 401(k) contribution can make net income look low while your finances are in good shape.