“How much do you make?” seems like a simple question — but the answer depends on whether you mean gross or net income. Using the wrong one in your budget or savings calculations can lead to serious miscalculations.

Gross income: what you earn before deductions

Gross income is your total income before any taxes, deductions, or withholdings. For an employee, it’s the number at the top of your paycheck — before Social Security, Medicare, federal income tax, state taxes, health insurance premiums, and 401(k) contributions are taken out.

For a self-employed person, gross income is total revenue before business expenses.

Examples of gross income:

  • Annual salary of $80,000 → gross income is $80,000
  • Hourly employee earning $25/hr × 2,080 hours → gross income is $52,000
  • Freelancer invoicing $120,000, with $40,000 in expenses → gross income is $120,000

Gross income is used by:

  • Lenders (mortgage qualification uses gross income for DTI calculations)
  • Landlords (most require rent to be 30% or less of gross income)
  • Financial benchmarks (the “save 15% of income” rule often refers to gross)

Net income: what you actually take home

Net income (also called “take-home pay”) is what hits your bank account after all deductions. For employees, this includes:

  • Federal income tax withheld
  • State and local income taxes
  • Social Security (6.2%) and Medicare (1.45%)
  • Health/dental/vision insurance premiums
  • Pre-tax 401(k) contributions
  • Any other voluntary deductions

Net income is what you actually have to spend.

For a $80,000 gross salary, net income might be $57,000-$62,000 depending on your tax situation, state, and deductions.

Why the difference matters

For budgeting: Always use net income as your baseline. The 50/30/20 rule and similar frameworks work best on what you actually receive. Building a budget around gross income and then being surprised when taxes are taken out is a common beginner mistake.

For savings rates: Here’s where it gets complicated. Different advisors mean different things when they say “save 15%”:

  • 15% of gross income is the more common benchmark (used by Fidelity and many retirement calculators)
  • 15% of net income is easier to work with in a day-to-day budget

On a $80,000 salary with $60,000 net income:

  • 15% of gross = $12,000/year = $1,000/month
  • 15% of net = $9,000/year = $750/month

The difference adds up significantly over time. Most retirement planning tools and our Retirement Calculator use gross income as the reference — check which convention your tools use.

For mortgage qualification: Lenders use gross income. If you earn $80,000 gross, a lender might approve a mortgage where PITI (principal, interest, taxes, insurance) is up to 28% of gross, or $22,400/year ($1,867/month). But your net income is $60,000 — that same payment is 37% of what you actually receive.

This is why mortgage affordability calculators reference gross income but you should stress-test those numbers against your actual take-home.

For the self-employed: it’s more complicated

Freelancers and business owners have two levels to consider:

  1. Business gross income: total revenue
  2. Business net income (profit): revenue minus legitimate business expenses
  3. Personal gross income: the profit you pay yourself
  4. Personal net income: after self-employment tax (15.3% on the first $168,600 in 2025), income taxes, and health insurance

A freelancer invoicing $120,000 with $30,000 in legitimate expenses has $90,000 in business net income. After self-employment tax ($12,600), federal income tax ($15,000), and state taxes (~$5,000), they might take home around $57,000.

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