After-Tax Income: Overview and Calculations
Net income after federal, state, and withholding taxes is after-tax income. Consumers and businesses have disposable money after taxes.
Understand After-Tax Income
Most individual tax filers compute taxable income, income tax payable, and after-tax income using IRS Form 1040.
Subtracting deductions from gross income yields after-tax income. The difference is taxable income, subject to taxes. After-tax income is gross income minus income tax.
For example, Abi Sample earns $30,000 and deducts $10,000, making her taxable income $20,000. Federal income tax is 15%. Therefore, they pay $3,000. After taxes, gross earnings minus income tax equals $27,000 ($30,000 – $3,000).
Individuals can include state and local taxes in after-tax income. Sales and property taxes are also excluded from gross income. Following the preceding example, Abi Sample pays $1,000 in state income tax and $500 in municipal income tax, resulting in an after-tax income of $25,500.
Business After-Tax Income Calculation
Business after-tax income is similar to personal income. Companies start with total revenues, not gross income. The firm’s income is calculated by subtracting business expenses from revenues. Finally, taxable income is calculated by subtracting various deductions.
Taxable income is the difference between total revenues and business expenses and deductions. After-tax income is the business’s income minus the tax.
Post-tax and pre-tax retirement contributions
Retirement contributions or other benefits are typically called after-tax and pretax income. For instance, pretax retirement account contributions are deducted from gross pay. Employers calculate payroll taxes after deducting gross salary.
After deductions from gross salary, Medicare and Social Security contributions are calculated on the difference, if the employee makes after-tax retirement contributions, the employer taxes the employee’s gross compensation and subtracts the retirement contributions.
Conclusion
- Gross income minus federal, state, and withholding taxes is after-tax income.
- An individual or company’s disposable income is after-tax income.
- Business after-tax income is calculated similarly to individual income using total revenues instead of gross income.
