A paycheck is the end of a short calculation: gross pay, minus deductions, equals net pay. Taxes are where the confusion starts, mostly around one idea: your rate is applied to slices of income, not to the whole amount. The tax brackets below are invented round numbers to show the mechanics; real rates, bands and rules change by country and year, so use the calculators for your own situation.
From annual salary to a paycheck
An annual salary of $60,000 paid every two weeks (26 times a year) is $2,307.69 gross per paycheck. Before income tax, US employees also pay Social Security (6.2%) and Medicare (1.45%), together 7.65%, which is $176.54 of that paycheck. The Paycheck Calculator adds federal tax, deductions and your net figure. Convert between pay periods with the Salary to Hourly Calculator (a full-time year is 2,080 hours) and add time-and-a-half with the Overtime Calculator; total hours on the Time Card Calculator.
Marginal versus effective tax rate
With the example brackets, the first $10,000 is taxed at 10%, the next $30,000 at 20% and everything above $40,000 at 30%. Tax on $60,000 is therefore built slice by slice:
| Taxable income band | Rate | Tax on this band at $60,000 |
|---|---|---|
| First $10,000 | 10% | $1,000 |
| $10,000 to $40,000 | 20% | $6,000 |
| Above $40,000 | 30% | $6,000 |
| Total | $13,000 |
That is $13,000, an effective rate of 21.67% of income, although the marginal rate, the rate on the next dollar, is 30%. So a $5,000 raise (to $65,000) adds $1,500 of tax, leaving $3,500. A raise can never push your total take-home below what you had before, because only the new slice is taxed at the higher rate. The Income Tax Calculator applies real brackets, and the Marriage Tax Calculator compares filing separately and jointly.
Self-employment
If you work for yourself you pay both halves of Social Security and Medicare. The tax is 15.3% of 92.35% of profit (the 92.35% reflects the deduction for the employer half). On $50,000 of profit that is $46,175 of net earnings and $7,065 of self-employment tax, of which half ($3,532) is deductible. Estimate it, and the quarterly payment, in the Self-Employment Tax Calculator.
Pricing your time
A freelancer's hourly rate has to cover income, expenses, taxes and unpaid time. For $60,000 of desired income plus $6,000 of expenses, with a 25% tax reserve, you need to bill $88,000; over 48 working weeks at 25 billable hours (1,200 hours) that is $73.33 an hour. The Freelance Hourly Rate Calculator does this for your numbers.
Raises and commissions
- Raise: 5% on $60,000 is $63,000 a year, $115.38 more per biweekly paycheck before tax. Repeating a 5% raise for three years gives $69,458. See the Pay Raise Calculator.
- Tiered commission: 5% on the first $10,000 of sales, 8% up to $50,000 and 10% above pays $4,700 on $60,000 of sales ($500 + $3,200 + $1,000). Try the Commission Calculator.
Everyday money decisions
- Budget: the 50/30/20 guideline splits take-home pay into needs, wants and savings. On $4,000 that is $2,000, $1,200 and $800. Compare your actuals in the Budget Calculator.
- Unit price: the bigger pack is not always cheaper per unit. 750 mL for $2.49 is $3.32 a litre; 1.5 L for $4.29 is $2.86, 14% less. The Unit Price Calculator converts units for you.
- Shared rent: splitting $2,700 by room size (150, 120 and 100 square feet) gives $1,094.59, $875.68 and $729.73; use the Rent Split Calculator, and the Rent Calculator to check what rent you can afford.
- Large estates may owe estate tax above a high exemption set by law; see the Estate Tax Calculator.
Common mistakes
- Thinking a raise can lower your pay. Only the extra dollars are taxed at the higher rate.
- Confusing gross and net. Compare job offers on gross, but budget with net.
- Forgetting both halves of payroll tax when self-employed. Reserve 25 to 30% of profit for taxes.
- Using an average rate for a marginal decision. Use the marginal rate for what the next dollar costs.