How to Find Your Net Income Step by Step

Understanding your net income is essential for managing your budget, planning savings, and making informed financial decisions. It reflects the actual amount you take home after deductions, not just what you earn on paper. Whether you’re an employee or self-employed, knowing how to calculate it ensures better financial control.

To determine net income, you must consider more than just salary. This guide covers gathering necessary documents, identifying deductions, and making adjustments before arriving at the final number.

Distinguishing Gross and Net

Gross income is total earnings before deductions, including wages, salaries, bonuses, and commissions. For self-employed individuals, it encompasses revenue from services or product sales before subtracting business expenses.

Net income is what remains after deductions such as taxes, retirement contributions, and insurance premiums. This is the amount available for spending and saving. The difference between gross and net income can be significant.

For example, an employee earning $60,000 won’t take home the full amount. Federal income tax, state tax (if applicable), Social Security (6.2% in 2024), and Medicare (1.45%) are deducted, along with voluntary contributions like a 401(k) or health insurance premiums. If these deductions total $15,000, net income would be $45,000.

Required Documentation

Accurate net income calculations require key documents. Pay stubs provide a breakdown of earnings, including base salary, overtime, and bonuses, while also listing deductions for taxes, benefits, and other withholdings. Reviewing multiple pay stubs helps identify inconsistencies or changes in earnings.

Bank statements track income from freelance work, rental properties, or side businesses, which may not appear on employer-issued documents. These statements help reconcile reported income with actual deposits.

Investment income requires brokerage statements and dividend reports, which outline capital gains, interest earnings, and dividends. Tax forms like the 1099-DIV or 1099-INT provide official records.

Self-employed individuals need profit and loss statements, invoices, and expense records to separate business revenue from personal earnings and ensure deductible expenses are accounted for. Keeping organized financial records simplifies tax reporting and provides a clearer picture of actual income.

Mandatory Deductions

Mandatory deductions reduce earnings before voluntary withholdings. The largest is federal income tax, withheld from each paycheck based on W-4 form selections. The amount varies by filing status, taxable income, and tax brackets. In 2024, federal tax rates range from 10% to 37%.

State and local taxes also impact earnings, with rates varying by location. Some states, like Texas and Florida, have no state income tax, while others, such as California, have rates up to 13.3%. Some cities impose local income taxes as well.

Social Security and Medicare taxes, known as FICA taxes, are mandatory for most employees. In 2024, Social Security tax is 6.2% on wages up to $168,600, while Medicare tax is 1.45% with no income cap. High earners—those making over $200,000 as single filers or $250,000 for married couples—pay an additional 0.9% Medicare surtax.

Court-ordered deductions, such as child support or wage garnishments, also reduce income. Employers must withhold these amounts based on legal directives. Child support garnishments can be up to 50%-65% of disposable income, depending on whether the individual supports another family.

Additional Adjustments

Beyond mandatory deductions, other adjustments refine net income calculations. Contributions to health savings accounts (HSA) or flexible spending accounts (FSA) lower taxable income while covering medical expenses. In 2024, individuals can contribute up to $4,150 to an HSA and $3,200 to an FSA, with these amounts deducted pre-tax.

Retirement contributions also affect net income. Traditional 401(k) or 403(b) contributions, capped at $23,000 in 2024 ($30,500 for those 50 and older), are excluded from taxable wages, reducing federal tax liability. Roth accounts, in contrast, use post-tax contributions but allow tax-free withdrawals in retirement.

Stock compensation, such as restricted stock units (RSUs) or employee stock purchase plans (ESPPs), adds complexity. RSUs are taxed as ordinary income when they vest, while ESPP discounts may receive preferential tax treatment if holding period requirements are met. Failing to account for these can lead to unexpected tax liabilities.

Final Calculation

After accounting for all deductions and adjustments, the final step is determining net income by subtracting taxes, benefits, and other withholdings from gross earnings.

For example, an employee with a $75,000 salary who has $12,000 withheld for federal and state taxes, $5,738 for Social Security and Medicare, $6,000 in 401(k) contributions, and $3,000 for health insurance premiums would have a net income of $48,262.

Self-employed individuals must also deduct business expenses before applying self-employment tax, which is 15.3% in 2024. This covers both employer and employee portions of Social Security and Medicare. Keeping track of these deductions ensures an accurate understanding of take-home pay.