Understanding Your Paycheck: Taxes, Deductions & Net Pay Explained

You earn $60,000 a year but only see $44,000 in your bank account. Where does the other $16,000 go? Your pay stub holds the answer — if you know how to read it. This guide breaks down every deduction line by line.

Gross Pay vs. Net Pay

Gross pay is your total earnings before any deductions — the number in your offer letter. Net pay (take-home pay) is what actually hits your bank account after all deductions. The difference is made up of taxes and benefit contributions.

Federal Income Tax

The U.S. uses a progressive (marginal) tax system — you don't pay one flat rate on all your income. Instead, each dollar is taxed at the rate for the bracket it falls into.

For 2026, the seven brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A single filer earning $70,000 pays 10% on the first $11,925, 12% on the next $36,550, and 22% on the remainder — an effective rate of about 15.2%, not 22%.

Your employer uses the W-4 withholding form you filled out at hire to estimate how much to withhold each paycheck. If you under-withhold, you'll owe at tax time. If you over-withhold, you get a refund (but gave the government an interest-free loan).

FICA Taxes: Social Security & Medicare

FICA (Federal Insurance Contributions Act) funds Social Security and Medicare. Unlike income tax, FICA is a flat percentage — no brackets.

Your employer matches the 6.2% Social Security and 1.45% Medicare — so the full FICA contribution on your wages is 15.3%, split evenly. Self-employed workers pay both halves (15.3%) as self-employment tax.

State and Local Income Tax

43 states plus D.C. levy income tax. Rates and structures vary widely — California tops out at 13.3%, while Texas, Florida, and seven other states have no income tax at all. Some cities (New York City, Philadelphia, Pittsburgh) add their own local income tax on top.

Pre-Tax Deductions (They Reduce Your Taxable Income)

Pre-tax deductions come out of your gross pay before taxes are calculated — which means they lower the amount of income you're taxed on. Common pre-tax deductions include:

• 401(k) / 403(b) contributions — up to $23,500 in 2026 ($31,000 if 50+)
• Health insurance premiums — employer-sponsored plans are typically pre-tax
• HSA contributions — up to $4,300 for self-only coverage in 2026
• FSA contributions — up to $3,300 for healthcare FSA in 2026
• Dependent care FSA — up to $5,000 per household
• Commuter benefits — up to $315/month for transit and parking

A $500/month 401(k) contribution reduces your federal and state taxable income by $6,000/year. If you're in the 22% federal bracket and 5% state bracket, that's $1,620 in annual tax savings — essentially a 27% instant return on your contribution.

Post-Tax Deductions

These come out after taxes and don't reduce your taxable income:

• Roth 401(k) contributions — taxed now, tax-free in retirement
• Life and disability insurance (if paid by employee)
• Garnishments — court-ordered child support, student loan wage garnishment
• Union dues

Worked Example: $75,000 Salary, Single Filer

How to Increase Your Take-Home Pay

• Maximize pre-tax benefits — every dollar in your 401(k) or HSA lowers your taxable income
• Review your W-4 — if you always get a large refund, adjust allowances to get more each paycheck
• Claim all deductions — if your itemized deductions exceed the standard deduction ($15,000 single / $30,000 married in 2026), itemize
• Contribute to an FSA — use pre-tax dollars for medical and dependent care expenses