Tax-Efficient Salary Planning: Keep More of What You Earn

Your gross salary and your actual take-home pay can be strikingly different numbers. The gap is largely determined by how well you use the tax advantages available to you. This guide covers the key strategies that employees and contractors can use to legally minimize their tax burden.

Understand Your Effective Tax Rate

The US uses a progressive tax system, meaning different portions of your income are taxed at different rates. Your marginal rate is the rate applied to the last dollar you earn; your effective rate is the average rate across your entire income. Most people overestimate how much they pay because they confuse these two.

Use our Salary After Tax Calculator to estimate your net income at different effective tax rates.

Maximize Pre-Tax Retirement Contributions

Traditional 401(k) and IRA contributions reduce your taxable income dollar-for-dollar. In 2026, you can contribute up to $23,500 to a 401(k) (plus $7,500 catch-up if you are 50+). On a $90,000 salary, maxing a 401(k) reduces your taxable income to just $66,500, potentially dropping you into a lower bracket.

Use Health and Dependent Care FSAs

A Flexible Spending Account (FSA) lets you contribute pre-tax dollars for qualified medical expenses (up to $3,300 in 2026) or dependent care (up to $5,000 per household). These contributions reduce your FICA taxes as well as federal and state income taxes.

Take Advantage of an HSA (If Eligible)

If you have a High-Deductible Health Plan (HDHP), a Health Savings Account (HSA) offers a triple tax advantage: contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. In 2026, individuals can contribute up to $4,300 and families up to $8,550.

Consider Roth vs. Traditional Accounts Strategically

If you expect to be in a higher tax bracket in retirement, a Roth account (contributions taxed now, withdrawals tax-free) may be more advantageous than a traditional account. Many advisors recommend diversifying across both to give you tax flexibility in retirement.

Claim All Eligible Deductions

The standard deduction in 2026 is $15,000 for single filers and $30,000 for married filing jointly. If your itemized deductions (mortgage interest, charitable donations, state and local taxes up to $10,000) exceed the standard deduction, itemizing will reduce your tax bill further.

For Freelancers and Contractors

Self-employed individuals can deduct business expenses, contribute to a SEP-IRA (up to 25% of net self-employment income), and deduct half of the self-employment tax. Quarterly estimated tax payments also help avoid underpayment penalties.