After-Tax Income: Overview and Calculations

Key takeaways

• After-tax income (net income) is the amount available to spend after deducting federal, state, local, and withholding taxes from gross income.
• For individuals, after-tax income is calculated from gross pay minus deductions and income taxes. For businesses, start with total revenues and subtract expenses, deductions, and taxes.
• After-tax cash flows are the relevant measure for budgeting, forecasting, and assessing disposable income.

What is after-tax income?

After-tax income is the disposable income remaining after all applicable taxes have been deducted from gross income. It is sometimes called income after taxes or the net-of-tax amount. For individuals this generally means gross wages minus income taxes (federal, state, local) and withholding taxes. For businesses it means net income after corporate taxes.

How to calculate after-tax income (individuals)

Step-by-step:
1. Start with gross income (total wages, salaries, and other taxable income).
2. Subtract pre-tax deductions and adjustments (for example, certain retirement contributions or employer-sponsored benefits, where applicable) to determine taxable income.
3. Calculate income tax due (federal, and where applicable state and local income taxes) on taxable income.
4. Subtract income tax and any withholding/payroll taxes from gross income to arrive at after-tax income.

Example:
– Gross income: $30,000
– Deductions: $10,000 → Taxable income = $20,000
– Federal tax (15% on taxable income): $3,000
– After federal tax: $30,000 − $3,000 = $27,000
– If state tax = $1,000 and local tax = $500, final after-tax income = $27,000 − $1,500 = $25,500

Note: Payroll taxes and the treatment of specific deductions can affect the final take-home amount. Sales and property taxes are not typically subtracted from gross income for federal taxable income calculations, but they do reduce disposable income in practice.

How to calculate after-tax income (businesses)

For a business:
1. Start with total revenues.
2. Subtract business expenses recorded on the income statement to get operating income.
3. Subtract allowable business deductions to arrive at taxable income.
4. Compute taxes due on taxable income.
5. After-tax income = pre-tax income − income tax due.

This after-tax income represents what the firm can distribute to owners, reinvest, or use for other purposes.

After-tax vs. pretax contributions (retirement and payroll)

The terms after-tax and pretax frequently apply to retirement contributions and other payroll items:
* Pretax contributions reduce the amount of income subject to income tax before tax is calculated, lowering taxable income and income tax due.
After-tax contributions are taken from pay after taxes have been applied, so they do not reduce income taxes due.
Payroll taxes (Social Security, Medicare) and their interaction with pretax contributions depend on plan rules and tax regulations; in practice, whether payroll taxes are calculated before or after a given deduction varies by deduction type and jurisdiction.

Why after-tax income matters

After-tax income is the practical measure of available cash for consumption, saving, debt repayment, and investment. For personal budgeting and corporate cash-flow forecasting, after-tax projections provide a more accurate view of available funds than pretax figures.

Quick formulas

• Individual (simple): After-tax income ≈ Gross income − (federal income tax + state/local income tax + withholding/payroll taxes)
• Business: After-tax income = (Total revenues − expenses − deductions) − corporate income taxes

Sources

• Internal Revenue Service, Form 1040
• Internal Revenue Service, Retirement Topics — Contributions