Knowing how to calculate your net salary is important when it comes to managing finances as an independent contractor. If you’re considering starting a small business, you’ve likely come across many new financial terms as you begin to set your bill rate and put systems in place for tracking your time and collecting invoices.
Understanding these terms and numbers is important for evaluating the success and sustainability of your business.
If you previously worked as a W-2 employee, you may be familiar with the terms “net pay” and “gross pay.” Gross pay is the amount you receive before taxes and deductions—typically the largest number you’ll see on your pay stub.
Net pay, on the other hand, is the amount you receive after deductions have been taken out. Deductions can include federal and state taxes, Social Security and Medicare taxes (FICA), or health insurance costs.
Net salary is simply another way of referring to net pay. The two terms can be used interchangeably.
See: The Difference Between Gross Income and Net Income
When working as an independent contractor, your taxes are calculated a bit differently than they are for employees. You should plan to set aside roughly 30–35% of your gross income for taxes. These include income tax—based on your tax bracket—as well as self-employment tax.
Because you act as both employer and employee when working independently, you’re responsible for paying both halves of Social Security and Medicare (FICA) taxes. This is known as self-employment tax, and the current rate is 15.3%.
To calculate your net salary, estimate your total income and subtract applicable business expenses. Then, subtract your tax obligations. What remains is your net salary.
Learn More: Tax Planning Tips for Small Businesses
Let’s say your annual gross income is $100,000.
You have $10,000 in business expenses and plan to set aside 30% of your remaining income for taxes.
Your estimated net salary would be $63,000 for the year. This is the amount you can expect to take home to cover your personal living costs, savings, and other goals.
Discover: How to Estimate Your Taxes As an Independent Contractor
Understanding your net salary helps you make smarter financial decisions as you run your business. It gives you a clear picture of what you’re taking home after covering your expenses and paying taxes.
Knowing your net salary can help you:
When you know your numbers, it’s easier to stay on track and plan for growth.
Getting a clear handle on your finances is easier with the right tools. MBO Partners offers a variety of resources to support independent professionals at every stage of their journey. For example:
These tools can help you plan smarter, save time, and feel more confident in your career as an independent professional.
The information provided in the MBO blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO blog, you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.