Are Wages Quoted Before or After Taxes?

The salary figure presented in a job offer does not represent the actual amount of money that will land in your bank account. This is because wages are quoted before taxes and other deductions are taken out, a common point of confusion. Understanding the difference between the salary you are offered and the cash you ultimately have is key to managing your finances.

Understanding Gross Wages

The wage or salary figure quoted by an employer is known as gross wages. This represents the total amount of money you earn for a specific period before any subtractions are made. It is the figure used in employment agreements and salary negotiations. For example, if you accept a position with an annual salary of $52,000, your weekly gross wages would be $1,000.

The same principle applies to hourly employees. If your job pays $20 per hour and you work a 40-hour week, your gross wages for that week would be $800. This amount is calculated by multiplying the hourly rate by the hours worked. Any overtime pay, bonuses, or commissions are also included in this gross pay calculation.

This figure is what lenders review for loan applications and what the government uses to determine income tax brackets. Gross wages serve as the starting point from which all required and voluntary subtractions are made.

Identifying Deductions from Your Pay

The difference between your starting pay and your final take-home amount is due to deductions. These fall into two primary categories: those required by law and those you choose to have taken out.

Mandatory Deductions

Employers are legally required to withhold certain taxes from an employee’s paycheck, including federal, state, and local income taxes. The amount of income tax withheld is determined by the information you provide on your Form W-4, such as your filing status and number of dependents.

Another mandatory deduction is for FICA (Federal Insurance Contributions Act) taxes. This tax is composed of two separate parts: Social Security and Medicare. Employees pay 6.2% of their wages towards Social Security and 1.45% towards Medicare, with employers contributing a matching amount. While there is an annual wage limit for the Social Security tax, there is no such cap for Medicare taxes.

Voluntary Deductions

You may also have voluntary deductions for benefits or savings plans you elect to join. Common examples include premiums for health, dental, or vision insurance, which are paid for directly from your earnings.

Many employees also choose to contribute to retirement savings plans, such as a 401(k). These contributions are often made on a pre-tax basis, meaning the money is taken from your gross pay before income taxes are calculated. This lowers your total taxable income for the period. Other voluntary deductions can include contributions to a Health Savings Account (HSA) or payments for life insurance.

Determining Your Net Pay

After all deductions are subtracted from your gross wages, the remaining amount is your net pay, also known as “take-home pay.” This is the actual amount of money you receive from your employer and have available for expenses. The calculation is: Gross Wages – Total Deductions = Net Pay.

You can find these figures on your pay stub, which you receive with each paycheck. A pay stub lists your gross pay for the current period and year-to-date. It also provides an itemized list of all deductions, showing how much was taken out for each tax and voluntary benefit.

The final number on the pay stub is your net pay. Reviewing your pay stub helps you track where your money is going and ensure the deductions align with the choices you made on your Form W-4 and for benefits enrollment.