What Is Net Income?
Net income refers to the cash value of a paycheck after deductions. Gross income -- your pay before deductions -- starts with your wages for the pay period. For salaried workers, this equals your annual base salary divided by the number of pay periods in the year. Hourly workers' gross income equals their hourly wage multiplied by hours worked, plus any overtime pay. Additional income from nonemployment sources may adjust the gross amount. Deductions can be pretax, tax or after-tax. Net income is your actual take-home pay after all adjustments.
Gross Income Gross income includes your regular earnings for the pay period plus other income such as tips. For salaried employees, if your base salary is $52,000 a year, your weekly wages are $1,000. If you receive $20 an hour as an hourly worker and work 40 hours, your weekly wages are $800. The same principles hold for biweekly, semi-monthly and monthly paychecks. Additional income items include bonuses and profit sharing. You also may receive reimbursements for time off due to vacations, holidays, sick pays and other reasons. The paycheck sums all your wages to report the gross income for the period. Most paychecks also report year-to-date totals.
Pretax deductions reduce your taxable income -- in other words, they are tax-deductible. The money for these deductions goes into one or more tax-deferred or tax-exempt accounts, such as qualified pension plans, flexible spending accounts for health care or childcare, pretax commuting costs and charitable donations. You may also have pretax deductions for one or more insurance categories, such as medical, dental and vision. Pretax income is gross income minus pretax deductions.
The tax withheld from your paycheck depends on several factors, including pretax income and the number of exemptions you claim on a W-4 form. The standard tax items include federal payroll tax deductions for Social Security and Medicare, state and local income taxes and state disability tax. Your employer withholds these taxes and periodically forwards the money to the appropriate tax-collecting agencies. Your pretax income minus your tax withholdings equals your post-tax income.
After-tax deductions are not tax-deductible. You might contribute some of your taxable income to one or more accounts, such as employee stock purchase plans, repayment of 401(k) loans, employer loans, Christmas club or another category. The money left over afterwards is your net income.
Tracking Your Paychecks
Quicken provides a Paycheck Setup Wizard that allows you to track your gross income, deductions and net income. The simple process requires you to set up the amounts and destinations of your deductions. For example, if you contribute to a 401(k) account that you've set up in Quicken, each paycheck will automatically update the 401(k) account balance. Setting up a paycheck in Quicken helps you track your gross income, net income and adjustments, which makes it easy to prepare your annual income tax return.