Understanding Your Paycheck
Module: Tax Essentials • Lesson 2
Your paycheck is not the same as your salary
When you get a job, you are told an hourly wage or yearly salary. That number is your gross pay.
Gross pay is the total amount you earn before anything is taken out.
Your actual paycheck is smaller because taxes and required deductions are removed.
What you take home is called net pay.
Gross pay - deductions = net pay
This is the most important formula to understand about your paycheck
Why money is taken out of your paycheck
Employers are required to withhold taxes from your earnings and send them to the government on your behalf.
This prevents you from having to pay a large amount all at once later.
The government collects taxes gradually through paycheck withholding.
Withholding is automatic and required by law
The major deductions you will see
You Start With:
GROSS PAY
Your full salary before deductions
Federal income tax
This goes to the national government based on your earnings.
The amount withheld depends on:
Your income level (higher income = higher tax)
How you filled out your W-4 form
Your filing status (single, married, etc.)
This is one of the largest deductions on your paycheck
State income tax
This goes to your state government.
Not every state has the same tax rate. Some take more, some take none.
States with NO income tax include:
Texas, Florida, Nevada, Washington, Tennessee, Wyoming, South Dakota, Alaska, New Hampshire
But this deduction exists in most states with rates ranging from 2% to 13%.
Social Security tax
This funds retirement and disability benefits for workers in the U.S.
6.2%
You pay this percentage of your earnings
6.2%
Your employer pays this separately
This tax is required for almost all workers
Medicare tax
This funds healthcare for older adults and certain individuals.
1.45%
You pay this percentage of your earnings
1.45%
Your employer matches this amount
Social Security + Medicare = FICA taxes (7.65% total from your pay)
What You Actually Take Home:
NET PAY
Your salary after all deductions
What withholding really means
Withholding is money taken out early to cover taxes you owe later.
Think of it as prepaying your taxes
If too much is withheld:
You get a refund when you file your tax return
If too little is withheld:
You owe money at tax time (and may face penalties)
Withholding happens automatically every pay period
Real paycheck example
You earn $2,000 this pay period (gross pay)
You earned $2,000, but took home $1,527 after deductions (about 76% of gross pay)
What you can control
Your W-4 form
When you start a job, you fill out a W-4 form. This tells your employer how much federal tax to withhold. You can adjust this if you are having too much or too little withheld.
Additional withholding
You can request extra money to be withheld if you want a larger refund or have other income sources.
What you cannot control
Some deductions are required and cannot be changed
Social Security tax (6.2%) - This is mandatory for all workers
Medicare tax (1.45%) - This is mandatory for all workers
State and local taxes - These are set by your state/city government
Key vocabulary
Gross pay
Total earnings before any deductions
Net pay
Take-home pay after all deductions
Withholding
Money taken from your paycheck for taxes
W-4 form
Form that determines federal tax withholding
FICA
Social Security and Medicare taxes (7.65% total)
Deduction
Money removed from your gross pay
Quick recap
Your paycheck is smaller than your salary due to deductions
Gross pay is what you earn before deductions
Net pay is what you take home after deductions
Federal income tax is usually the largest deduction
State income tax varies by state (some have none)
FICA taxes (Social Security + Medicare) total 7.65%
Withholding is required and happens automatically
You can adjust federal withholding with your W-4 form
Quick Check
1. What is gross pay?
2. What percentage do you pay for FICA taxes (Social Security + Medicare)?
3. What happens if too little tax is withheld from your paycheck?
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