Understanding Your Paycheck: A Complete Guide to Deductions

Gross Pay vs. Net Pay

The most important distinction on your pay stub is between gross pay and net pay. Gross pay is the total amount your employer owes you for the pay period before any deductions. If you earn $75,000 per year and are paid biweekly, your gross pay per paycheck is approximately $2,884.62.

Net pay, also called take-home pay, is what remains after every mandatory and voluntary deduction is subtracted. For most workers, net pay is 65% to 80% of gross pay, depending on tax bracket, state taxes, and benefit elections. The gap between gross and net is where understanding your paycheck becomes critical.

Use our Take-Home Pay Calculator to see the exact breakdown for your salary.

Federal Income Tax Withholding

Federal income tax is typically the largest single deduction on your paycheck. The amount withheld depends on three factors: your taxable income, your filing status, and the information on your W-4 form.

The United States uses a progressive tax system with seven brackets for 2026:

• 10% on income up to $11,600 (single) / $23,200 (married filing jointly)
• 12% on income from $11,601 to $47,150 / $23,201 to $94,300
• 22% on income from $47,151 to $100,525 / $94,301 to $201,050
• 24% on income from $100,526 to $191,950 / $201,051 to $383,900
• 32% on income from $191,951 to $243,725 / $383,901 to $487,450
• 35% on income from $243,726 to $609,350 / $487,451 to $731,200
• 37% on income above $609,350 / above $731,200

A common misconception is that moving into a higher tax bracket means all your income is taxed at the higher rate. That is not how it works. Only the income within each bracket is taxed at that bracket's rate. Someone earning $60,000 as a single filer pays 10% on the first $11,600, 12% on the next $35,550, and 22% on the remaining $12,850 (after the standard deduction of $15,000 is applied).

Your employer uses IRS Publication 15-T tables to determine how much to withhold from each paycheck. The withholding is an estimate; your actual tax liability is settled when you file your annual return.

The W-4 Form: Controlling Your Withholding

The W-4 is the form you fill out when starting a new job (and can update anytime). It tells your employer how much federal income tax to withhold. The current W-4 asks for:

• Filing status (single, married, head of household)
• Whether you hold multiple jobs or your spouse works
• Dependent credits
• Other adjustments (additional income, deductions, extra withholding)

If you consistently receive large tax refunds, you are overwithholding and giving the government an interest-free loan. If you owe taxes every April, you are underwithholding and may face penalties. The IRS offers a free Tax Withholding Estimator to help you dial in the right amount.

State Income Tax

Most states impose their own income tax on top of federal taxes. Rates and structures vary enormously:

• No income tax: Alaska, Florida, Nevada, New Hampshire (dividends/interest only), South Dakota, Tennessee, Texas, Washington, Wyoming
• Flat tax states: Colorado (4.4%), Illinois (4.95%), Indiana (3.05%), Kentucky (4.0%), Massachusetts (5.0%), Michigan (4.25%), North Carolina (4.5%), Pennsylvania (3.07%), Utah (4.65%)
• Progressive tax states: California (1% to 13.3%), New York (4% to 10.9%), New Jersey (1.4% to 10.75%), and many others

Some cities and counties add their own local income taxes. New York City residents, for example, pay city income tax of 3.078% to 3.876% on top of state and federal taxes. These local taxes can significantly reduce your take-home pay and are often overlooked when comparing job offers across locations.

Social Security Tax (OASDI)

Social Security tax, formally called Old-Age, Survivors, and Disability Insurance (OASDI), funds retirement benefits, survivor benefits, and disability payments. As an employee, you pay 6.2% of your gross wages up to the annual wage base limit of $168,600 for 2026. Your employer matches this with another 6.2%.

Once your year-to-date earnings exceed $168,600, no additional Social Security tax is withheld for the rest of the year. If you work multiple jobs and your combined wages exceed the cap, you can claim a refund for the excess when you file your tax return.

On a $75,000 salary, your annual Social Security tax is $4,650 (6.2% x $75,000), or about $178.85 per biweekly paycheck.

Medicare Tax

Medicare tax funds the federal health insurance program for people 65 and older. The employee rate is 1.45% of all wages with no cap. Your employer matches this amount.

High earners pay an Additional Medicare Tax of 0.9% on wages exceeding $200,000 (single) or $250,000 (married filing jointly). This additional tax is not matched by the employer. If your employer does not withhold enough (common with multiple jobs), you will owe it when you file your return.

On a $75,000 salary, your annual Medicare tax is $1,087.50 (1.45% x $75,000), or about $41.83 per biweekly paycheck.

FICA: The Combined Payroll Tax

FICA (Federal Insurance Contributions Act) is the umbrella term for Social Security and Medicare taxes combined. For most workers, the total FICA rate is 7.65% (6.2% + 1.45%). On a $75,000 salary, that is $5,737.50 per year or about $220.67 per biweekly paycheck.

Unlike federal income tax, FICA taxes are calculated on your gross pay before the standard deduction. Pre-tax 401(k) contributions reduce your income tax but do not reduce FICA taxes. This is an important distinction that many people miss.

Pre-Tax Deductions

Pre-tax deductions are subtracted from your gross pay before income taxes are calculated. This reduces your taxable income and therefore your tax bill. Common pre-tax deductions include:

Traditional 401(k) Contributions

Contributions to a traditional 401(k) plan are deducted before federal and state income taxes. The 2026 contribution limit is $23,500, with an additional $7,500 catch-up for employees age 50 and older. If you contribute 6% of a $75,000 salary ($4,500), your taxable income drops to $70,500, saving you roughly $990 in federal taxes (at the 22% bracket).

Note: 401(k) contributions are still subject to FICA taxes. A Roth 401(k), by contrast, is a post-tax deduction and does not reduce your current taxable income.

Health Insurance Premiums

Most employer-sponsored health insurance premiums are deducted pre-tax through a Section 125 cafeteria plan. The average employee contribution for single coverage is about $1,400 per year ($115/month), while family coverage averages about $6,100 per year ($508/month). These amounts vary widely by employer and plan.

Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP), you can contribute to an HSA. For 2026, the limits are $4,300 for individual coverage and $8,550 for family coverage. HSA contributions are pre-tax (reducing income and FICA taxes if contributed through payroll), grow tax-free, and can be withdrawn tax-free for qualified medical expenses. This triple tax advantage makes HSAs one of the most powerful savings vehicles available.

Flexible Spending Account (FSA)

An FSA lets you set aside up to $3,300 (2026) pre-tax for medical expenses or up to $5,000 for dependent care. Unlike HSAs, most FSAs have a "use it or lose it" rule, though some plans offer a $640 rollover or 2.5-month grace period.

Commuter Benefits

Some employers offer pre-tax transit and parking benefits. For 2026, you can set aside up to $325 per month for transit and $325 per month for parking, reducing your taxable income by up to $7,800 per year.

Post-Tax Deductions

Post-tax deductions are taken after all taxes are calculated. They do not reduce your current tax bill. Common post-tax deductions include:

• Roth 401(k) contributions: Contributed with after-tax dollars, but withdrawals in retirement are tax-free.
• Life insurance premiums: Employer-provided coverage over $50,000 is taxable; additional voluntary coverage is typically post-tax.
• Disability insurance: If you pay premiums post-tax, any benefits you receive are tax-free.
• Wage garnishments: Court-ordered deductions for child support, student loans, or debt are taken post-tax.
• Union dues: Typically deducted after taxes.

Reading Your Pay Stub

A standard pay stub includes several sections. Here is what to look for:

• Earnings: Regular hours/salary, overtime, bonuses, commissions, and other compensation.
• Pre-tax deductions: 401(k), health insurance, HSA, FSA, and similar items.
• Taxes: Federal income tax, state income tax, local tax, Social Security, and Medicare.
• Post-tax deductions: Roth contributions, life insurance, garnishments, union dues.
• Net pay: Your actual deposit amount.
• Year-to-date (YTD) totals: Cumulative figures for the calendar year. Review these periodically to catch errors early.

Compare your YTD federal withholding against what our Take-Home Pay Calculator estimates for the full year. If the numbers are far apart, consider updating your W-4.

Common Paycheck Mistakes to Watch For

Payroll errors happen more often than you might think. Here are things to check:

• Wrong filing status: If you recently married or divorced, make sure your W-4 reflects the change.
• Incorrect 401(k) percentage: Verify your contribution matches what you elected, especially after open enrollment.
• Missing overtime: Check that overtime hours are paid at 1.5x (or higher) your regular rate.
• Benefit deduction errors: After open enrollment, confirm your health insurance tier (single vs. family) is correct.
• State tax in the wrong state: Remote workers should verify taxes are withheld for the correct state.

How to Increase Your Take-Home Pay

There are legitimate ways to increase your net pay without earning more gross income:

• Optimize your W-4: If you get large refunds, reduce withholding to get more in each paycheck.
• Maximize pre-tax deductions: HSA and traditional 401(k) contributions lower your tax bill now.
• Use commuter benefits: Pre-tax transit and parking save 25-35% compared to paying with after-tax dollars.
• Review benefit elections annually: During open enrollment, compare plan costs. A higher-deductible plan with an HSA may cost less overall.
• Claim eligible credits: The Child Tax Credit, Earned Income Tax Credit, and education credits can significantly reduce your tax liability.

Frequently Asked Questions