Estimating Net Income

I know, I know. It’s the day after Christmas. The last thing you want to do is read about managing your finances. Not so fast!

Every minute you spend on end-of-the-year financial planning translates exponentially into less aggravation and time spent next year. That planning starts with estimating your net income for next year. Don’t let your finances go to seed. Act now.

As I was writing this newsletter, I couldn’t help but notice the similarities between the subject matter and my activities in the garden. Between autumn rains, I’ve learned over the years to cultivate around my newly sprouted garlic.

I can eliminate dozens of teeny tiny weeds with a single stroke of my circle hoe. Just a little work now saves hours of weed-pulling later.

Once you’ve got an estimate of your net income, as well as planning other essential financial tasks, you can put the financial side of your life on autopilot. Concentrate on more important things like your family and fun next year rather than worrying about money.

Gross Income

Estimating your income can be relatively easy, or hard depending on your income sources and how you’re paid. It’s important to get as accurate an estimate as you can. You’ve got to know how much you’re working with before you can start managing it.

Get out last year’s tax return and re-acquaint yourself with your past income sources. Will your income repeat, or will there be a drop-off or premium? Go ahead and project that anticipated income as best you can.

Make sure to include all your income. Don’t forget about capital gains, losses, and dividends in addition to your W-2, 1099, or self-employment income.

Gross Versus Net

You’re trying to predict net income, not gross. Gross isn’t accurate enough. What exactly is the difference between your gross and net pay? Net pay is what’s left over after subtracting out deductions for taxes and any employee benefits. Check past pay stubs or your company’s website for this information.

Payroll Taxes

Tax withholding is all about Uncle Sam, America’s name for the federal government of the USA and the IRS, wanting his tax money as you earn it rather than waiting until April 15th of the following year to get it.

Federal Withholding

There are a few different ways to satisfy your Uncle Sam’s lust for your future tax debt. If you had a refund coming from the previous year, you can elect to put that towards next year’s taxes. Otherwise, you, your employer, or both of you need to send money to Uncle Sam during the tax year.

This can be done one of two ways, or a combination. It doesn’t matter how you do it, that money ends up in the same place: That special spot in the US Treasury reserved for your future tax dollars.

If you’re an employee, you filled out a W-4 form ( when you were hired. This form attempts to estimate your federal tax liability. Check and see how good a job it did. Compare the federal withholding totals on your year-end W-2 forms to your actual tax liability computed on your tax returns.

Don’t be surprised if your federal withholding percentage wasn’t very accurate. Because of changes in the tax code, confusing instructions, and questions you’re unable to answer when first hired, it’s no wonder the percentage might be off.

Change your federal withholding percentage based on your gross income estimate by completing a new W-4 on your company’s website or paying a visit to HR. It’s a good feeling knowing you won’t get stuck with a big tax bill later.

Another important reason to accurately predict your federal tax withholding is the penalty levied by the IRS if you underestimate it. Your Uncle Sam will charge you an interest penalty from the time he should have received the delinquent withholding (based on estimated tax due dates) until it’s paid. Make sure to stay on your uncle’s good side and get him his money on time.

Estimated Tax Payments

As an alternative to W-4 withholding or in addition to it, you can make estimated tax payments directly to Uncle Sam and the US Treasury. In normal years, the due dates are April 15, June 15, September 15, and January 15 for income earned during the previous months. If you’re self-employed, making estimated tax payments is your only option to pay your withholding.

Download your estimated tax payment coupons and detailed instructions at ( or arrange to make electronic payments.

Social Security and Medicare Taxes

For 2024, the first $168,600 of your wages is subject to Social Security tax at the rate of 6.2%. Your employer kicks in another 6.2%. That’s 12.4% of your paycheck.

1.45% of your pay goes to Medicare, which will help pay your medical bills come age 65 and older. Same as Social Security, your employer kicks in another 1.45% on your behalf (2.9% total). Medicare tax has no upper-income threshold like the Social Security tax does.

That’s a total of 15.3% of your gross pay for Social Security and Medicare taxes. I don’t know about you, but I’ve been paying those taxes every paycheck for nearly 50 working years. Hopefully, our legislators will fix these programs’ shortfalls so we can all benefit from what we thought we had coming.

State Taxes

If your state of residence has a state income tax, it most likely has withholding requirements too. Just like you did with the federal tax, compare your withheld tax with the estimate and adjust your state withholding percentage accordingly.

401(k)-Type Plan Contributions

If you’ve got a 401(k), 403(b), 401(a), 457, or other employer-sponsored retirement plan, consider yourself lucky. Unless you’ve got a dog plan, these accounts are hands-down the best places to save and invest because of the tax advantages and high contribution limits.

Want to reach your financial goal sooner than later? Consider raising your contribution percentage for 2024. Note that 401k contribution limits are higher for 2024.

There’s always a tradeoff between saving and spending. Choose your contribution percentage carefully, then defend it at all costs!

Your 401(k)-type plan contribution should be going toward longer-term goals like financial independence and retirement. Use a money market or high-yield savings account for shorter-term goals.

Other Employee Benefit Deductions

If your employer offers numerous employee benefits, check for other paycheck deductions. You’ll need to wait for your company’s open enrollment period to change some of them. Only keep the ones that support your financial plan:

Life Insurance premiumDisability Insurance premium
Health Insurance premiumESPP or ESOP contribution
Health Saving Account contributionFlexible Spending Account contribution

Year-End Financial Planning

Left with less competition from weeds, my garlic sprouts will thrive, and hopefully, someday look like last year’s crop.

A little financial planning now, at the end of the year, will save you countless hours next year, as well as reduce your money-induced anxiety. More importantly, your pre-determined savings rate and saving every paycheck philosophy, along with your stock and securities investing know-how, will help your savings grow faster.

[Best Money Newsletter originally published 2023 1226 on the Cold Moon.]