Working World

So, you've nailed the interview, negotiated a salary, and landed the job of your dreams. That’s great, but before you upgrade your lifestyle, take a minute and brush up on the differences between gross and net income.

The amount you bring home each month — your net income — could be up to 20 percent less than your gross salary once federal, social security and Medicare taxes have been taken out. Subtract from that any state or local taxes, health insurance premiums and retirement savings, and you can expect to chop another 10 percent or more off the top.

▶ Federal Tax: The amount you're required to pay in federal taxes will depend on how many allowances you claim on your W-4. In general, employees who are married or those with children generally withhold less than their unmarried and childless peers. Federal income withholdings are deducted from your annual federal taxes, so the higher your withholdings year-round the less you'll owe during tax season in April.

▶ State Tax: Like federal taxes, the amount owed in state taxes will depend on your number of withholdings.

▶ Social Security Taxes: Employees must have 6.2 percent of their gross income withheld for FICA taxes, to be matched in the form of an employer contribution. This money is held in trust by the government until you retire, when it's released in the form of social security benefits.

▶ Medicare: Employees must pay 1.45 percent of their gross salary toward Medicare to ensure they'll be covered by the health insurance system when they turn 65.

▶ Medical and Dental Insurance: Even if your employer sponsors a company plan, you'll still be required to cover the cost of monthly premiums and associated fees. These premiums can be deducted before taxes — which reduces the amount of taxable gross pay— or after, although the specific cost will vary depending on the plan.

▶ Retirement Savings: Paying into an employer-sponsored retirement plan, such as a 401(k) or IRA, can help reduce your taxable gross income and create a tax-deferred savings plan to help cover costs in the future.

When all is said and done, the amount an employee brings home each month can be up to 30 percent less than his or her gross salary, which is why it's so important to understand what your net paycheck will look like when negotiating a salary for a new job.  

Stephanie Miles is a freelance writer living in New York City.