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Net pay is the amount of money you receive from your employer after taxes and other deductions have been taken out. It's also known as take-home pay because it's the amount of money you actually take home to use for your expenses.
Gross pay, on the other hand, is the total amount of money you earn before taxes and other deductions are taken out.
Why is net pay important?
Net pay helps you understand how much money you have available to cover your expenses, save for the future or spend on the things you want. Knowing your net pay can help you budget your money and make informed decisions about your finances.
For example, if your net pay is $3,000 per month, you know that you have that amount of money available to cover your regular expenses, such as rent or mortgage payments, and to contribute toward long-term goals, like retirement and other investments.
How is net pay calculated?
Net pay is calculated by subtracting all of the deductions from your gross pay. These deductions can include federal income taxes, state income taxes, Social Security and Medicare taxes, health insurance premiums, retirement plan contributions and other withholdings.
Formula: Net pay = Gross pay - Total payroll deductions
To calculate net pay, you'll need to know your gross pay, as well as the specific deductions that apply to your situation. If you have a regular job, your employer should provide you with a pay stub or other documentation that shows your gross pay, deductions and net pay.
Your net pay should match the dollar amount of your paycheck or automatic deposit. But it’s worthwhile to check your pay stub to see what deductions are coming out of your pay — both to verify the accuracy of your deductions and to better understand your income for budgeting purposes.
It's also important to note that your net pay can vary each pay period, depending on changes in your income, tax rates and other factors.
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