Ask HN: Salary discussions – numbers are before or after taxes? Every time I'm reading discussion on salaries I'm not really sure what number people are actually talking about. Is it net or gross? Before or after income taxes? |
Ask HN: Salary discussions – numbers are before or after taxes? Every time I'm reading discussion on salaries I'm not really sure what number people are actually talking about. Is it net or gross? Before or after income taxes? |
Always negotiate your compensation in gross. Always negotiate hourly in hours, salary in years or months (most places prefer the former, but depending on your country it might be customary to discuss in the latter). A multiplication/division by 12 is usually sufficient.
Hourly pay means you work time, you get paid for exactly that time (give or take 15 minutes sometimes, usually it's rounded, often up to the next hour). Payments usually made every two weeks or every month.
Salaries are paid at a fixed frequency, usually monthly - sometimes, in very very rare cases, semiannually or even annually. Don't bother asking for a different pay schedule as it's generally company-wide and very difficult to change, and it also shouldn't affect you if you manage your own money correctly - the amount of money you make on average over time remains the same.
The reason for gross is, as you mention, taxes. Your specific situation affects how much you contribute to your community/country (via taxes), and the percentage/amount usually changes over time as your living situation changes (you get married, have children, get a raise, etc).
Your employer can't possibly know all of this in most cases (namely in the US, but also elsewhere) and also it's not their burden to manage your taxes (again, usually - namely in the US).
Your job is "I do services, you pay me for those services". The company needs to know how much they're paying for your services. How that income breaks down for you is your own deal.
Imagine a case where you're in a high tax bracket because you have a lot of successful side gigs. Your employer, paying net, would thus have to pay you more in order to keep the rate competitive for you, simply because you make more elsewhere. The employer loses out pretty heavily in this case. Just doesn't make much sense to do it that way.
Maybe the employee will sell equity as it vests, maybe they'll keep it and sell it all ten years later. These choices will all drastically change the tax situation.
A good employer will work with you as a team to help you realize your financial strategy.
I wish that were a universal truth, but it decidedly does not apply to RSUs which most equity compensation comes in the form of.
We have plenty of deductions from our gross that are compulsory, before getting to the net before taxes. It means that the x€ you hear is actually x€*0.6 or less.
Bringing the number down to what actually hits your taxes (and then your bank account) makes the proposal look less grandiose.
So if you ever wonder, take your $160,000 per year and you are making $80 per hour... so your complaints about salary will diminish.
Everything depends on the person. For example the same 2 people can make exactly the same, but live in 2 different states.
And with state income tax is varying from 10% all the way down to 0%, this choice of locale can make a big difference
So even in the same state, two different employers paying the same gross salary could mean very different net salaries. Unfortunately, it's also a big pain in my experience to get companies to disclose this information before hiring.
If I had one wish it would be to decouple healthcare from employment. No one should have a nightmare scenario where they get fired on Wednesday and next week can't afford their wife's heart medicine.
In Denmark it's always pre-tax, because tax laws are so complicated that not even the tax authority knows how much you'll end up paying, and so we have an "adjustment" after the fact where you'll either get to pay an amount more, or get an amount back.. It's hilariously sad.
That seems like something the US/UK would have so they can place infinite carve outs for special interest groups.
Then we have for some reason, chosen to subsidize banks, by letting people not pay tax on the percentage of money they pay to the bank that constitutes the interest. Then there are a million other factors that might influence it..
On top of that, you're not actually only taxed for the amount of money you earn in a year, you're taxed by the amount of money you thought, last year, that you were going to earn this year.. and there's more, that I am ignorant about, because I just.. accept that it's a black box and either receive or pay the money they ask at the end of the tax year.
The idea is that a tax system should be "progressive", meaning people who earn a high income should pay a higher percentage of their income in tax, and conversely people who earn very little should pay a low, zero or even negative percentage.
Now imagine you work for two employers overlapping in time. E.g. one job in the daytimes and another in the evenings.
Your employers don't know about each other, so your total earnings before tax will not be known by either employer, but you should pay a higher percentage of tax due to your higher total income. So the state has to be involved in the calculation.
This is not true, in some countries. In the US it is true.
This had the advantage to the school that employees knew how much of a health benefit they were receiving, employees paychecks looked bigger (until you got to the take home part), and the school paid less taxes (not sure how, but that was the main reason they did it).
It was basically an accounting trick to shift costs to employees, similar to the old trick of giving raises that match inflation; so employees think they are getting raises, and even if they notice the raise only matches inflation (difficult to tell if the business year doesn't match the physical year since official inflation figures for the entire year won't be published till later), what they don't realize is the raise only happens once a year so they are losing to inflation the rest of the year. A very sneaky way to take money away from employees and reduce company costs. I suspect this is part of how USA wages have been held flat for decades.
I'd also like to stress that, along with taxes, there are also tax benefits in play, which are highly dependent on your personal circumstances and willingness to pursue them, and can also have a limited timespan.
For instance, some European countries offer generous tax benefits to highly skilled professionals willing to relocate which are only applicable for a few years and require the employee to jump through a few hurdles to benefit from them. If we leave it to recruiters to do the tax math, unscrupulous recruiter might use that to create inflated expectations regarding net salary and disposable income.
For salary in my country (Australia) though, the figure usually doesn’t include superannuation (payments into a kind of third party pension fund) which is applied on top (legislated as a compulsory 10% on top of the wage).
An unmarried person making $150,000 In San Francisco would pay $37,816 in taxes for a net income of $112,184.
If that same person was married with a non-working spouse the same person would pay only $29,836 in taxes for a net income of $120,164.
This person could also legally reduce their tax burden by contributing to retirement accounts. Let's take the married San Franciscan if they maxed out their 401k contributions they'd pay $25,546 in taxes for a net income of $124,454. If they moved to Texas then they'd pay $25,546 in taxes, or a net of $124,454
Those are just no frills situations with standard deduction, employees can have itemized deductions that reduce their tax burden more.
Calculations come from https://smartasset.com/taxes/income-taxes
I respect the European model but the US model is not going away since taxes are situation dependent and culturally folks have a different attitude about taxes
The employer needs to pay an additional 25-30% on top of the gross salary for social security benefits but that amount is not included in the gross salary figure.
There's far too many tax variables to discuss salaries at net level.
* location depending.
This is certainly the case today in some places, but has not been the norm in most places (unfortunately).
We have gross minus "various debits for retirement, health care, etc" (fixed, a percentage of the gross) and then minus income taxes (that vary from person to person)
We have gross minus "various debits for retirement, health care, etc" (fixed, a percentage of the gross) and then minus income taxes (that vary from person to person)
You have your gross salary - let's say, 100k.
From that, before taxes, is deducted the employee health insurance premiums (may be $0 to ~10k), employee retirement contributions (up to 19k), perhaps health savings account contributions (up to 7k), and possibly some others. Obviously, these can be quite substantial! But, at least, some of them are "optional" in that you are, for example, free to underfund your 401(k).
After that, federal and state income taxes are taken out, and a special tax for Medicare and Social Security.
Many of these are impacted by the vagaries of each employer. If you know your pre-tax income, you can easily calculate your taxes. But figuring out what your pre-tax income will be is not something you can figure out from the headline gross number. The biggest factor is the employer health insurance plans and your expected premium contribution - getting this out of an employer before being hired is like pulling teeth.
Although HSA and 401(k) contributions are elective, so you'd think you could determine that ahead of time...well, if the employer doesn't have a HDHP, then you don't get an HSA at all. Conversely, if they do, the amount of the deductible and the amount of the possible employer contribution (which counts toward the maximum allowable contribution by the IRS) factor into how much you expect to come out of your pay check. This is also tough info to get out ahead of time. 401(k) contributions fall into a similar but less severe problem - there's often an employer contribution, but it counts toward the allowed maximum, so you cannot determine from your gross salary alone how much you will be contributing toward your 401(k), even if you know ahead of time the dollar amount you want to contribute. Employers are often a little better about telling you their 401(k) contribution benefits ahead of hiring, though.
You have the gross that is the usual negotiating point because the number sounds larger.
Then there are compulsory deductions (national, the amount decided by the law). They cover health insurance, disability, retirement, ... The amount deducted from your salary is also (for the most part) paid by the employer (same amount).
To this may be added extra money, again regulated by the law which is a percentage of your "gross before taxes" (above) - this is dependent on the size of the company, inflation, etc. (intéressement et participation)
We are now at "gross before income taxes". These taxes change between people (married, children, some specific renovations in your house, ...) but for the vast, vast majority of people (probably 95%) they are pre-calculated and you go to the national tax site, click next a few times and you are done (literally 3 minutes). The taxes themselves are deducted by your employer.
So what you get in your bank account is really a net amount you can spend. It is substantially smaller than the gross (about 50% I guess) and it would make much more sense to negotiate on that one because thi sis what you can actually spend.