About this video
This video explains the difference between gross income and net income using a job that pays $4,000 a month but gives a $3,000 paycheck. The missing money goes to state and federal income taxes and payroll taxes. Gross means before anything is taken out; net means after.
You'll be able to
- explain the difference between gross income and net income.
- name things taken out of a paycheck, such as income and payroll taxes.
- find the amount taken out by subtracting net income from gross income.
Key words
- gross income
- The full amount you earn before anything is taken out.
- net income
- The amount you actually get after taxes and other things are taken out.
- payroll taxes
- Taxes taken from your pay for things like Social Security and Medicare.
- refund
- Money given back to you if you paid too much tax during the year.
Transcript
- [Instructor] The first time you get a job, you are likely to be surprised because of the difference between gross income and net income. Let's do an example here. Let's say you took a job and they said that they're going to pay you $4,000 per month, and they're also going to pay you monthly just for the sake of this example.
And so after working for a month, you get your first paycheck and you're really excited to get that $4,000. But when you open up that envelope, if they're paying you with a check, you see it's not $4,000 it's $3,000, and you say, "There must be a mistake here.
What happened to the other $1,000?" And you should double check that there wasn't a mistake of some kind. But what likely happens, or let's say for this example, what does happen is that other things are taken out from your salary before you get paid. And these are things like state and federal income taxes.
There's also things like payroll taxes, and these are things to pay for things like social security and Medicare. And so what you get after paying those taxes and at the end of the year you can do your taxes to make sure that everything was done right. And sometimes you get a refund if you overpaid taxes or sometimes you have to pay more if you underpaid taxes.
But the difference between that 4,000 and that 3,000, that's the difference between gross and net income. The 4,000, your salary that they said they're going to pay you, and your employer is paying out $4,000. But then all of this other stuff gets taken out. And what you're left with is your net income, right over here.
In general, in life, when people say gross anything, and they're not saying gross, like something that makes you wanna gag or feel nauseated. They're talking about gross before you start taking things out. And normally when they talk about net, that means that some things have been taken out already.
(keyboard clicking)
Video © Khan Academy, used under CC BY-NC-SA. Watch on Khan Academy. Puzzicle is not affiliated with Khan Academy.