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Topic 4.1: Income
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Understanding your values can help you set achievable financial goals.
What is Income?
Income is money you receive.
Types of Income
Earned income
Income from assets or investments
Public benefits or entitlements that pay money
Other benefits or other entitlements
Other income, such as gifts, child support, and alimony
Gross vs Net Income
You usually take home less money than you make from working.
Gross income is your total income without deductions.
Net income (or take-home pay) is gross income minus deductions, such as Social Security and income taxes.
Ways you may receive Income
Check
Cash
Direct Deposit
Payroll Card
Government Program
Understanding your Pay Statements
Reading your pay statement helps you monitor it for accuracy and track your pay. You will also understand how the money you earn is not the same as the amount of money you receive.
There are various formats for paychecks, and they often contain numerous abbreviations. If you have questions about your pay statement, please ask your employer or HR department.
Information on a typical pay statement may include:
Personal information
Pay period
Pay date
Gross pay
Deductions
Net pay
Employer contributions
Balances for personal time off, vacation, and/or sick leave
Deductions
Federal Insurance Contributions Act (FICA) taxes, such as Social Security and Medicare
Federal income taxes
State and local income taxes (if applicable)
Elective or voluntary deductions may include:
Insurance premiums
Union dues
Charitable contributions
Allotments to a savings account
Retirement Plan Contributions (which may be either mandatory or voluntary deductions).
Income Tax Withholding
You will typically complete IRS Form W-4 (Employee’s Withholding Certificate), as well as a similar one for your state.
On the W-4, you can indicate:
Additional amount to be withheld (decreases your take-home pay)
Reduced amount to be withheld (increases your take-home pay).
If you are exempt from withholding
⚠️ Be Careful not to have too little withheld for taxes ⚠️
If you don’t have enough tax withheld during the year, you will owe taxes at tax time and may even have to pay a penalty.
You can view Form W-4 and detailed instructions for completing it by visiting IRS.gov and searching for “W-4”. If you have any questions about the form or need assistance with completing it, please ask your employer for help.
Employees vs Self-Employed Individuals
It is essential to understand how you are being paid and whether you are a W2 employee or a 1099 employee.
If you receive Form W-2, the employer considers you an employee.
If you receive Form 1099-MISC, you are considered a self-employed contractor.
Self-Employed Individuals ("Contractors")
If you receive a 1099, you may be responsible for paying taxes yourself, often through quarterly estimated tax payments.
Making estimated tax payments on time is critical and helps you avoid penalties. It also helps ensure that you are not surprised at tax time.
You may be responsible for making your own federal, state, and even local tax payments, each of which requires different forms and steps.
Self-employed individuals must keep very accurate records and information about their income, taxes paid, and business expenses.
Tracking Your Income
Many people receive income from multiple sources. Making a list of your sources of income helps you plan how you will save, share, and spend it.
Income can be:
Regular (received on a weekly, bi-weekly, or monthly basis)
Unpredictable (unscheduled overtime or occasional side-gigs)
Seasonal (only during certain times of the year, such as a summer job)
One-time (a special opportunity you had to make some extra money)
Understanding whether each source of income is regular, unpredictable, seasonal, or one-time can help you plan, save, share, and spend effectively.
Remember the Key Takeaways:
Understanding your income is the first step to using it to meet your financial needs.
Knowing whether each source of income is regular, unpredictable, seasonal, or one-time can help you plan, save, share, and spend effectively.
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