Gross vs. Net Earnings
The term gross earnings means the total amount of money received before taxes and other deductions are taken from your paycheck. Many workers can figure out their gross earnings by taking the number of hours they work and multiplying by their hourly pay rate. For workers who receive a salary, they earn a fixed amount regardless of the hours they work.
The term net earnings means the amount you take home after taxes and other deductions have been taken out of your gross earnings. Let’s look at some common deductions:
- Federal income tax: this money goes to the federal government to pay for things like national defense, healthcare, roads, and parks.
- State income tax: this money goes to the Commonwealth of Pennsylvania to pay for things like schools, health clinics, museums, and libraries.
- Local wage tax: this money goes to the city or township where you live to pay for things like the fire department, the police department, and community projects.
- Social Security tax: this money goes to pay for retirement, disability, and survivorship benefits.
- Medicare tax: this money supports healthcare for seniors and some people with permanent disabilities.
- Health insurance premiums: this money pays for your healthcare benefits if offered by your employer.
- Retirement benefits: this money goes into a separate fund that pays you benefits when you retire.
When figuring out how much money you have to spend each month, always use your net earnings.
Example: Assume an individual had an annual income of $20,000 in 2020 and filed taxes as a single person living in Philadelphia, Pennsylvania.
Their gross earnings would be $20,000.
Their net earnings would be $14,672.
- To find out if you are eligible for government benefits and to sign up, check out COMPASS, www.compass.state.pa.us, or call 1-800-692-7462.
- Make sure that you have the correct amount of federal income tax withheld from your paycheck. The IRS has a withholding calculator that can help determine how much tax should come out of the money you earn at http://www.irs.gov/Individuals/IRS-Withholding-Calculator.
- You can increase the amount of your tax refund through tax credits and deductions. The Volunteer Income Tax Assistance (VITA) Program offers free help with preparing tax returns to people who make $57,000 or less. VITA programs can be found at community centers, libraries, shopping malls, and other convenient locations. To find VITA assistance in your area call 1-800-906-9887.