Gross Pay vs. Net Pay
The first thing to understand is the difference between what you're owed and what you receive. Your gross pay is your total earnings before anything is taken out. If you make $20/hour and work 80 hours in a two-week pay period, your gross pay is $1,600.
Your net pay — also called take-home pay — is what actually gets deposited in your bank account after all deductions. For most Americans, net pay is 65–75% of gross pay. That gap surprises a lot of people getting their first paycheck.
That's $490 in deductions per paycheck — $12,740 per year — on a $50,000 salary. Not a scam, just the reality of how American compensation works.
The Earnings Section
Most pay stubs start with an earnings section listing everything you were paid this period. This may include:
- Regular pay: Your base hourly or salary earnings
- Overtime pay: Hours beyond 40 per week, paid at 1.5× your regular rate (federal law requires this for non-exempt employees)
- Bonus or commission: Variable compensation, taxed as regular income
- Holiday pay or PTO: Paid time off used during the period
- Reimbursements: Expense reimbursements (usually not taxed)
The Tax Deductions — What Each One Is
Federal Income Tax
The amount withheld depends on your W-4 form (filed when you started the job) and how much you've already earned year-to-date. Your employer uses IRS withholding tables to estimate how much you'll owe for the year, then withholds that amount gradually across each paycheck.
Social Security (6.2%)
Social Security funds retirement and disability benefits. Every employee pays exactly 6.2% of their gross wages up to a cap — in 2025, the cap is $176,100. Above that, no more Social Security is withheld for the rest of the year. Your employer pays another 6.2% on top, so the total going to Social Security on your behalf is 12.4%.
Medicare (1.45%)
Medicare funds health coverage for Americans over 65. The rate is a flat 1.45% with no income cap. High earners (over $200,000) pay an additional 0.9%. Your employer also matches your 1.45%.
Social Security (6.2%) + Medicare (1.45%) = 7.65% of every paycheck, no matter what. This is called the FICA tax. On $50,000/year, that's $3,825 per year going to these programs — automatically, before you see a dollar.
State Income Tax
Depends on where you live. California's income tax ranges from 1% to 13.3% depending on income. Texas, Florida, Nevada, and six other states charge zero state income tax — residents there keep significantly more of their paycheck.
Pre-Tax Deductions — These Actually Help You
Pre-tax deductions are amounts taken from your gross pay before income taxes are calculated. This reduces your taxable income, which means you pay less in taxes. These are a benefit, not just a cost.
| Deduction | What It Is | Tax Benefit |
|---|---|---|
| 401(k) contribution | Retirement savings withheld pre-tax | Reduces federal + state taxable income |
| Health insurance premium | Your share of employer health plan | Reduces federal + state taxable income |
| Dental/Vision insurance | Supplemental coverage premiums | Reduces federal + state taxable income |
| FSA/HSA contribution | Medical/dependent care savings | Reduces federal + state taxable income |
| Commuter benefits | Transit/parking pre-tax | Up to $315/mo federal tax-free (2025) |
If you contribute $200/month to a 401(k) and your marginal tax rate is 22%, you're saving $44 in taxes per month just from that contribution. The 401(k) contribution doesn't cost you the full $200 — it costs you about $156 out of pocket because the tax savings offset the rest.
Post-Tax Deductions
Post-tax deductions come out after taxes are calculated. You get no tax benefit from these, but they're still valid deductions your employer may take out:
- Roth 401(k) contributions: You pay taxes now so withdrawals in retirement are tax-free
- Life insurance premiums: Coverage above $50,000 in employer-provided life insurance
- Wage garnishments: Court-ordered deductions for child support, student loan defaults, or unpaid taxes
- Union dues: Monthly or weekly union membership fees
Year-to-Date Columns
Most pay stubs show both current period amounts and year-to-date (YTD) totals. YTD is the running total of everything since January 1 of the current year.
Pay attention to YTD because: it's what your W-2 will show at year end; it helps you verify your Social Security withholding stops at the cap; and it lets you track your actual annual earnings to avoid surprises at tax time.
Payroll errors are more common than you think — especially with overtime, shift differentials, and tip reporting. Compare your pay stub to your time records every pay period. If something looks wrong, report it to HR immediately. Employers are legally required to fix payroll errors.
How to Verify Your Paycheck Is Correct
- Multiply your hourly rate × hours worked (or divide your salary by pay periods)
- Verify Social Security withheld = gross pay × 6.2%
- Verify Medicare withheld = gross pay × 1.45%
- Check that 401(k) deductions match the percentage you elected
- Compare year-to-date earnings to your expected annual salary
If federal income tax withheld seems too low or too high, revisit your W-4 — you may need to update it, especially after a life event like marriage, divorce, or having a child.