Gross and Net Income: What’s the Difference?

Have you recently started working and earning income? Congratulations! You have probably heard of gross income and net income before, but now that you’re working, it is important to know the difference. Today, we review each one and share how both affect your path to financial independence through work.

Gross vs. net income

Gross income includes all of your income before any deductions are taken. For example, if you are working in a job in which you’re paid an hourly wage, your gross income is the hourly rate you’re paid multiplied by the number of hours you’ve worked during a pay period.

For instance, if your pay period is one week and you worked 20 hours at $12.00 per hour:
$12.00 x 20 = $240.00. That means that your gross pay for that pay period is $240.

However, you may notice that this is not the final amount of your paycheck. That’s because your paycheck will reflect your net income, or the amount of money once deductions — like taxes, employee benefits, or retirement plan contributions — have been considered. Taxes and other deductions vary by state and city, and other deductions may vary by employer. Your paystub should include an indication of what deductions have been taken and how much that deduction is. It’s a good idea to review this information — whether it’s by yourself or with someone else – to make sure your paycheck is accurate.

Reporting wages to Social Security

In the past, we’ve discussed the importance of reporting your work and wages to Social Security if you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits. It’s important to do this, as it’s one way to help avoid being overpaid by Social Security.

When reporting your wages, Social Security requires that you report your gross income — the amount you’ve earned before any deductions were taken from your paycheck. Social Security looks at gross income to determine whether you’re meeting or exceeding substantial gainful activity (SGA). If you receive SSDI and are still in your Trial Work Period (TWP), Social Security looks at your gross earnings to determine if you’ve used one of your TWP months.

Why net income is important

Net income (what remains of your paycheck after deductions are taken) is the money that you actually receive. This means that when you create your budget for living expenses, such as food, lodging, or transportation, you will base it on your net income. This is a more accurate number for the amount of money you have in your pocket — rather than the income you earn — each month.

Ticket to Work

Social Security’s Ticket to Work (Ticket) program supports career development for people ages 18 through 64 who receive Social Security disability benefits (SSI or SSDI) and want to work. The Ticket program is free and voluntary. It helps people with disabilities move toward financial independence and connects them with the services and support they need to succeed in the workforce.

Source: SSA: choosework.ssa.gov

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