Gross income and net income are two different numbers that describe your earnings — and confusing them is one of the most common financial mistakes people make, especially when budgeting or evaluating a job offer. Here’s exactly what each means.
What is gross income?
Gross income is your total earnings before any deductions. If your salary is $60,000/year, that’s your gross income. If you’re paid $3,000 every two weeks, your gross biweekly income is $3,000. This is the number employers advertise for job salaries and what’s used for loan applications and tax calculations.
What is net income?
Net income — often called “take-home pay” — is what actually hits your bank account after all deductions: federal income tax, state income tax (where applicable), Social Security tax (6.2%), Medicare tax (1.45%), health insurance premiums, 401k contributions, and any other pre-tax deductions. A $60,000 salary often results in $42,000–$47,000 in actual take-home pay.
Why confusing them causes problems
Many first-time earners see their salary offer and budget from that number — only to be shocked when their paycheck is thousands less than expected. Budgeting from gross income means your budget doesn’t work in real life. Always budget from your net income — the actual money you receive.
How to calculate your net income
For salaried employees: divide your annual salary by your pay periods (26 for biweekly, 24 for semi-monthly) to get gross per paycheck, then check your actual pay stub for the net amount. For freelancers and self-employed: subtract self-employment taxes (15.3%) and income taxes from gross revenue, plus business expenses, to estimate net income.
Gross income for different purposes
Mortgage lenders use gross income to calculate your debt-to-income ratio. The IRS taxes your adjusted gross income (gross minus certain deductions). Landlords typically want rent to be no more than 30% of gross income. Understanding which number applies in each situation prevents surprises.