How to read your paycheck: taxes, deductions, and net pay

Your paycheck arrives every two weeks. You glance at the bottom line. But between the gross pay and the net pay, a lot happens. Every line on your pay stub represents money going somewhere — taxes, benefits, retirement, or your bank account. Understanding each deduction helps you verify accuracy, plan your budget, and make informed decisions about your benefits.

Gross pay: where it starts

Gross pay is your total earnings before any deductions. If you are salaried at $60,000 per year and paid biweekly, your gross pay per check is roughly $2,308. If you are hourly, it is your hourly rate multiplied by hours worked in the pay period, including overtime at 1.5 times your regular rate.

Always verify that your gross pay matches what you expect. Hourly workers should track their hours and compare against the pay stub. Salaried workers should confirm their annual salary divided by the number of pay periods.

Federal income tax withholding

This is the biggest deduction on most paychecks. The amount withheld depends on your taxable wages, filing status, and the information on your W-4 form. The IRS publishes withholding tables that employers use to calculate the right amount.

If too little is withheld, you owe money at tax time — plus possible penalties. If too much is withheld, you get a refund but had an interest-free loan to the government. Adjust your W-4 to match your actual tax situation. The goal is to break even.

Social Security and Medicare (FICA)

FICA stands for the Federal Insurance Contributions Act. It funds Social Security and Medicare. Social Security tax is 6.2% of your gross pay up to the annual wage base limit ($176,100 in 2025). Medicare tax is 1.45% with no income limit. If you earn over $200,000, an additional 0.9% Medicare surtax applies.

Your employer matches both the Social Security and Medicare taxes. If you are self-employed, you pay both halves — the self-employment tax of 15.3% — but you deduct the employer half on your tax return.

State and local taxes

Most states impose a state income tax. Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire only taxes interest and dividends. Rates vary from flat percentages in some states to progressive brackets in others.

Some cities and counties also impose local income taxes. New York City, Philadelphia, and many Ohio cities have local withholding. Check your pay stub to confirm your state and local withholding match your actual residence.

Benefits deductions

Health insurance premiums are typically deducted pre-tax, meaning you do not pay income tax or FICA on that money. Dental, vision, and life insurance may also be deducted pre-tax depending on your employer’s plan.

Flexible spending accounts (FSA) and health savings accounts (HSA) are deducted pre-tax. These reduce your taxable income. An HSA offers a triple tax advantage — contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.

Retirement contributions

401(k) contributions are deducted pre-tax or Roth depending on your election. Pre-tax contributions lower your current taxable income. Roth contributions are after-tax but grow tax-free. Many employers match a percentage of your contributions — typically 50% of the first 6% of pay. Always contribute enough to get the full match.

Other deductions

Garnishments for child support, student loan default, or tax levies will appear as court-ordered deductions. Union dues, charitable contributions through payroll, and commuter benefits can also appear on your pay stub.

Net pay: what you actually take home

Net pay is your gross pay minus all deductions. This is the amount deposited into your bank account. If it seems lower than expected, review each deduction. A common surprise is that benefits deductions come out of the first paycheck of the month, making it smaller than the second.

Using the paycheck calculator

The Paycheck Calculator lets you enter your gross pay, filing status, pay frequency, and state to see what your net pay should be. Compare the result to your actual pay stub. If they differ significantly, your W-4 may need adjustment.

Understanding your paycheck gives you control over your finances. You can optimize your withholding, verify your pay is correct, and make informed choices about your benefits elections during open enrollment.