Understanding Your Paycheck: Taxes and Deductions Explained
Your paycheck's gross pay and net pay can look very different, and the gap can be confusing if you do not know what each line item means. Breaking down the deductions shows you exactly where your money goes — and how to legitimately reduce the amount withheld.
Federal income tax withholding
Employers withhold federal income tax based on the information on your W-4 form and the IRS withholding tables. This is an estimate of your annual tax liability spread across your paychecks. If the estimate is off — because you have multiple jobs, significant investment income, or large deductions — you will owe or get a refund at filing time.
FICA: Social Security and Medicare
The Federal Insurance Contributions Act (FICA) requires withholding 6.2% of gross wages for Social Security (up to the annual wage base) and 1.45% for Medicare, with no cap. Your employer matches these amounts. The combined employee rate is 7.65% — a fixed deduction that does not change with your W-4.
Pre-tax deductions reduce taxable income
Contributions to a 401(k), traditional IRA, HSA, or FSA are deducted before income tax is calculated, lowering your taxable income. A $200 per paycheck 401(k) contribution does not reduce your take-home pay by $200 — it reduces it by $200 minus the income tax you would have paid on that $200, making it an efficient way to save.