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Calculate gross and net income

Gross income is total earnings before deductions, calculated in straightforward payroll contexts from hourly rate × hours worked, salary distributed across pay periods, or stated commissions and bonuses. Net income, or take-home pay, is gross income minus deductions such as taxes, retirement contributions, and insurance, with deductions represented as fixed amounts or percentages of gross pay; complex tax brackets, investment income, and compound deductions are beyond this scope.

Detailed Explanation: Calculate gross and net income

Gross income is the total amount earned before any deductions. Net income is the amount you take home after deductions.

Example

Jordan earns $18 per hour and works 35 hours this week. The deductions are:

  • Taxes: 12% of gross pay
  • Retirement contribution: 5% of gross pay
  • Insurance: $40

Step 1: Calculate gross income

Multiply the hourly rate by the hours worked:

Gross income=18×35=$630\text{Gross income} = 18 \times 35 = \$630

Jordan’s gross income is $630.

Step 2: Calculate the percentage deductions

Taxes:

0.12×630=$75.600.12 \times 630 = \$75.60

Retirement contribution:

0.05×630=$31.500.05 \times 630 = \$31.50

Step 3: Add all deductions

Include the fixed insurance deduction:

75.60+31.50+40=$147.1075.60 + 31.50 + 40 = \$147.10

Total deductions are $147.10.

Step 4: Calculate net income

Subtract total deductions from gross income:

Net income=630−147.10=$482.90\text{Net income} = 630 - 147.10 = \$482.90

Jordan’s gross income is 630∗∗,andthe∗∗netincome,ortake−homepay,is630**, and the **net income, or take-home pay, is 482.90.

Learn by doing: Calculate gross and net income

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    Financial Literacy - Paycheck - Hours and Rate to Gross Income (Regular)

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