Definition: The Take-Home Pay is the portion of the salary that an employee gets after all taxes and deductions are discounted. To put it more simply, it is the actual amount of money deposited or paid in cash to the employee.
What Does Take Home Pay Mean?
Take-Home Pay is a very important figure for an individual, since it is the actual amount of money available to the employee to pay for his expenses and financial commitments. To understand this concept a little better we must state the difference between gross salary and take-home payment. The gross salary is the salary agreed upon in an employee’s contract.
But this gross salary has some mandatory deductions that must be paid by the employee and the company has the right to withdraw them from the gross salary to fulfill the payment of such commitments. These commitments might be government commitments such as taxes, Social Security and Medicare, among others; or they could be insurance commitments such as health insurance premiums. There are many different deductions and the take-home pay is the amount of money that’s left after those deductions are made.
Let’s take a look at this example,
Mr. Coleman was hired as an engineer in Big Buildings INC, a company that builds shopping malls in the city of Tennessee. Mr. Coleman signed a contract for $4,500 a month with the company. He will get full payment at the end of each month.
The company told him that there will be some deductions from his monthly payments; he will be deducted 5% for federal taxes, $300 a month for health insurance and $175 to pay for other government commitments. At the end of the first month, he got a wire transfer of $3,800 on his bank account. In this situation, which one would be the take-home pay for Mr. Coleman?
The take-home pay, as we discussed previously, is the portion of the salary that an employee actually gets. According to this definition, Mr. Coleman’s take-home pay would be $3,800.