How to calculate your income before and after taxes

It's important to understand what your total income is before and after taxes.

Your income is one of the most important factors when it comes to your finances and your ability to build wealth. There are two main definitions you need to become familiar with: gross income and net income, otherwise known as your pre-tax and post-tax income.

How to calculate income before taxes (pre-tax income)

Your pre-tax income is your total income before taxes. This amount includes your salary, bonuses, overtime, commissions, and any other income you may have.

If you have a regular job with an employer, this will be the amount on your job offer/contract. You can also look at your most recent paycheck and multiply your gross pay by the number of paychecks you receive per year.

For example, if your gross pay was $2,000 on your last paycheck and you get paid twice a month, you’d multiply $2,000 by 24 to get an annual income of $48,000 before taxes. If you get paid every two weeks, you’d multiply $2,000 by 26 to get an annual income of $52,000 before taxes.

If you’re self-employed or have irregular income, such as a commission-based job or a job with fluctuating hours, this will be more difficult to calculate. The easiest way to figure out your income before taxes will be to track your income throughout the year. This will help you get an idea of how much you typically make each month, on average. It’s important to track your income and expenses regardless of what type of employment you have, anyways.

You can also look at your tax returns for previous years to see how much you made and help estimate how much you might make this year. Your tax return will show you exactly how much income you made before and after taxes.

How to calculate income after taxes (post-tax income)

Calculating your income after taxes will work in a similar way. If you have a regular job, you can take your paystub and do the same calculation you did for your income before taxes, but this time you’ll use the net pay amount instead of the gross pay.

You’ll also need to make sure to add back any other deductions you’re making, such as retirement or benefit plan contributions. The only thing we want to be subtracting from your gross pay is taxes. This is important because it will give you a more accurate idea of your effective tax rate and how much money you have available for your savings/goals.

For those that are self-employed or have irregular income, the easiest way will be to look at tax returns for previous years. Depending on how much income your business is generating, you will most likely need to make tax payments throughout the year to avoid penalties as well. You can learn more about how to avoid penalties here.

Why are these important?

Knowing your income before and after taxes is crucial when it comes to financial planning. These figures will be used to determine realistic savings goals, how much you can spend each month, what loans you can qualify for, and much more.

It’s also important to know so that you can compare your income to others in your field and determine whether you’re being compensated fairly. This can be helpful with salary negotiations or finding new employment opportunities.

Increasing your income is one of the biggest factors when it comes to building wealth. The better you understand your income before and after taxes, the better off you’ll be financially.