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# Calculate Your True Hourly Pay

The dork in me wants to bring out the dork in you. Besides a few minutes spent on a calculator and rummaging through your old paychecks and last year’s taxes, you won’t have to do much to figure out your true hourly take-home pay. Mine comes out to \$95/hr…. pretty sweet.

In America people shout off their annual gross salaries to represent their income – not quite accurate. In business circles, entrepreneurs talk about their net or profits, their gross could be some absurd number. Financial columns like to throw big numbers at you such as “Company X made \$1.5 billion in sales in 2015”. If company X had an overhead of \$1.1 billion vs an overhead of \$500 million then the bottom line would be quite different.

Let’s start off with the easy one, calculating your hourly take-home pay. I am assuming you are a salaried employee which means dental, health, disability, life insurance and malpractice is covered for you.

Add up your net pay on each paycheck for the year and divide that by your gross income. If you ended up owing money that year to the IRS then deduct that from your net-pay and if you got money back then add that into your net-pay. I had a net income of \$144,000 for 2015, I got around \$6k back after doing taxes, for a total of \$150k of net income.

\$257k of gross income, from which \$18k is not taxed. \$93k of total taxes paid for 2015.

I grossed \$257k in 2015 and worked an average of 45 hours a week. Dividing \$150k by \$257k will give me my approximate tax rate. This takes into account federal income taxes, state income taxes, social security as well as medicare taxes. My number comes out to 58%. For every dollar I make I lose \$0.42 to taxes and get to keep \$0.58. My hourly rate would be \$150k divided by the total hours worked, in my case 45*52=2340. As far as what I see in my checking account, the key number here is \$64 for every hour worked.

Next, we need to account for any contributions your company makes on your behalf. In my scenario I get to set aside \$18k in my 401k (this comes out of my gross paycheck, so out of my own pocket). Another 21% is set aside for me based on the gross income I make. 21% of \$257k is \$54k, and adding in the \$18k from the 401k gives me \$72k. This \$72k is approximately 28% of my gross salary. Which means, for every dollar I make in gross income, \$0.28 is added to my greedy little pockets by my employer.

I know this is getting a bit to math-y. So let’s recap. Working 45 hours/wk on average, 52 weeks, that’s an hourly rate of \$110/hr. I get to keep \$64/hr based on my 42% tax rate. I also get another 28% of my gross pay set aside in tax-deferred moneys, which is \$31/hr for a total of \$95/hr. There it is, the magic number. For every hour that I work at my medical group, I can expect to pocket \$95 dollars.

Don’t worry too much about over-time rates being different in your particular scenario or different tax rates based on how much you make. The reason being that once you go past \$200k the numbers even out because you stop getting taxed for social security after \$118k but then you get taxed a little more for medicare. Your extra pay working overtime diminishes in value due to the excess income being taxed at a higher rate etc.

#### How This Information Is Valuable

Knowing your true hourly rate helps you make better decisions in life. Those of you with student loans might be debating whether you should work the extra shift. Or whether to stay 2 extra hours at work instead of spending it with your family.

I would see my paycheck go up by \$64 for every extra hour I work. Today I am relaxing at my office writing this post, enjoying a couple of cups of delicious black coffee and plan on going to the gym in a bit. I could go into work and do a 4-hour shift, but would \$256 be worth this time?

Imagine if I had \$250k in debt that I’m trying to demolish. How much time would I need in order to pay this off at my \$64/hr rate?

• 3,900 hours of work
• 390 10-hour shifts
• 278 14-hour shifts
• 2 extra 10-hour shifts a week for 3.75 years
• 3 extra 10-hour shifts a week for 2.5 years
• 4 extra 10-hour shifts a week for 1 year and 10 months

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