Pre-Tax vs. Post-Tax Income

How Much Do You Really Make?

Pre-tax vs. post-tax income is one area that is so commonly overlooked by so many people until they start taking a closer look at their personal finances. 

It’s so important to understand the difference between your gross pay and actual income so that you can plan your finances more accurately. Yet many of us don’t really know or understand what that difference is until we see it on our income tax documents the following year. 

Your annual salary doesn’t paint the whole picture of your finances. Let’s look at the difference between pre-tax and after-tax pay and how it impacts your wallet.

Pre-tax vs. post-tax: what’s the difference?

When people talk about income and salary and they tell you how much money they make, the numbers they mention are usually pre-tax numbers, also known as gross pay. That means they're speaking of their income before any taxes get taken out. 

The thing is, when you get paid, your salary gets paid post-tax. This means you get paid after taxes and other deductions have been taken out of your salary.

Deductions withheld from your paycheck may include:

  • Federal: Based on your gross income and the information on your W-4

  • State and/or local (if applicable)

  • FICA: the U.S. Federal payroll tax for Social Security and Medicare

  • Insurance: health, dental, group life.

  • Savings: 401k, pension, FSA

What’s left is your take-home pay (aka your net pay) and how much you really earn.

Though you may get paid post-tax, many people still think about their overall salary in terms of their pre-tax amounts. This causes some people to assume they make more than they really do which can have a major impact on their overall financial planning. And in turn, may cause them to spend more than they can really afford.

Confusing? Here's an example:

Meet Lisa. Lisa makes $50,000 a year pre-tax, but her biweekly post-tax salary after 25% taxes (assuming 25% is her tax bracket plus other deductions) is $1,562.50. This means post-tax, Lisa really only makes $37,500 a year. But because she's never really sat down to calculate her overall post-tax salary, Lisa still tells herself that she makes $50,000 a year.

Lisa’s Income: Pre-tax vs. Post-tax
Pre-tax salary$50,000
Subtract taxes (25%)$12,500
Actual income after taxes$37,500

From a mindset perspective, $50,000 is a lot more than $37,500. So Lisa buys things that cost way more than she can really afford because in her mind she will somehow be able to pay for it later. She books the vacations and upgrades her car and her also closet. After all, she makes $50,000 a year. She might not even realize the mistake she's making in the way she's determining her income.

Does this make sense yet?

Do you ever feel like you make all this money a year but you never seem to have enough money based on what you think you earn? Take a step back and think about your yearly income from a post-tax perspective. Then, create your budget accordingly. This simple exercise can make all the difference as you create your monthly budget and set your yearly financial goals.

Investing in pre-tax vs. post-tax accounts

It's not just your salary that's subject to differences in pre-tax vs post-tax status. There are investment accounts that distinguish between pre-tax and post-tax, as well. The main difference? What your tax bill looks like at the end of each year. 

Pre-tax investment accounts, like Roth IRAs, 401(k)s and some pension accounts, are accounts you invest in on a pre-tax basis. That means a pre-determined amount of your money goes into these accounts each pay period, and then you're taxed on the rest. 

When you invest in pre-tax accounts, your taxable income will be reduced, and thus, you'll pay fewer taxes each year. 

Post-tax accounts are basic savings accounts you might put money into every pay period. Other post-tax accounts are brokerage accounts, CDs, mutual funds, index funds and education accounts, like 529s or ESAs.

While post-tax accounts do not lower your tax liability, those still have huge benefits as well, so don't let this be your only consideration when deciding how and when to save money.

Figuring out your post-tax income

Fortunately, you don’t need to do too much work in order to figure out how much you’re making after taxes. National Endowment for Financial Education’s calculator “Payroll Adjustments and Take-Home Pay” is a great place to start. Your paystubs will also have a breakdown of the deductions taken from your check.

Don't plan for $50,000 when you really only make $37,500 after considering taxes. Don't get caught up in massive loans that banks will qualify you for based on your pre-tax income. Do your own due diligence and understand what you can really afford. It's entirely up to you to properly assess your pre-tax income against what you can feasibly afford.

{Updated by Cristy S. Lynch}


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