What is Net Salary: Definition and How to Calculate

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 are probably encountering 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 to determine the sustainability and success of your business. It can lead to realistic goal setting and benchmarking as you build your business.

Learn how to calculate your bill rate as an independent contractor

Net Salary: Definition

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. This is typically the largest number you’ll see on your pay stub. Net pay, on the other hand, is the amount you receive after deductions 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 term you may hear for net pay. You can use the two interchangeably.

Learn more about gross income vs. net income here

How Do You Calculate Net Salary?

When working as an independent contractor, your taxes are calculated a bit differently. When working independently, plan to pay around 30-35% of your gross income in taxes. Taxes include income tax, based on your tax bracket, as well as self-employment tax. Because you act both as an employer and employee when working independently, you are responsible for paying both halves of social security and Medicare (FICA) taxes—this is self-employment tax. The current self-employment tax rate is 15.3%.

To calculate your net salary, estimate your net earnings and then subtract that number from your gross income minus any additional business expenses.

Check out the tax implications of becoming an independent contractor

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.