How to Read a Paycheck: Withholding, Taxes, and Take-Home Pay

Your offer letter said $65,000. Your first direct deposit said $1,839.57 for two weeks of work, and nobody attached a note explaining the other $660.43. That gap isn't a mistake, and it isn't one tax. It's five or six different things stacked on top of each other, each with its own rule. Once you know what each line is doing, the pay stub stops being a mystery and starts being a checklist you can actually audit.

Gross pay is the number you agreed to, not the number you get

Gross pay is your full earnings for the period before anything is taken out: salary divided by pay periods, or hours times rate plus overtime. Every other line on the stub is a subtraction from this number, in a specific order that matters: some deductions happen before taxes are calculated, some after.

Federal income tax withholding: an estimate, not a final bill

Your employer withholds federal income tax based on the W-4 you filled out (filing status, dependents, any extra withholding you requested) and the IRS wage-bracket or percentage tables in Publication 15-T. This number is a prepayment toward your actual tax liability, not the liability itself, which is why you might get a refund or owe more when you file. Withholding is recalculated whenever you submit a new W-4, and it does not know about a second job, a spouse's income, or a side gig unless you tell it to.

FICA: Social Security and Medicare, split with your employer

FICA is two separate taxes bundled together, and unlike federal withholding, the rates are fixed, not based on your W-4. You pay 6.2% of wages toward Social Security and 1.45% toward Medicare; your employer matches both, dollar for dollar, out of its own pocket. Social Security tax only applies up to an annual wage cap that adjusts most years, so check the current figure at the Social Security Administration rather than assume last year's number still applies. Medicare tax has no cap, and if your wages exceed a high threshold, an Additional Medicare Tax of 0.9% kicks in on the amount above it, withheld by your employer with no matching contribution. Most workers below that threshold will simply see 6.2% and 1.45% each on every paycheck (IRS Topic 751).

State and local withholding varies enormously

Some states (Texas, Florida, Washington, and a handful of others) have no state income tax at all, so this line is zero. Most states withhold on a schedule similar in spirit to the federal one (a percentage based on income and filing status), but the brackets, standard deductions, and forms are entirely state-specific. A few cities (New York City and Philadelphia are the best-known examples) add a local tax on top. If you moved states mid-year or work remotely across state lines, this is the line most likely to be wrong, because payroll software doesn't always catch the change automatically.

Pre-tax deductions shrink the taxable number before any of this math happens

This is the part that trips people up most, because not every deduction reduces the same taxes.

A traditional 401(k) or 403(b) deferral reduces the wages federal income tax (and usually state income tax) is calculated on, but FICA still applies to the full gross amount. Contributing to a Roth 401(k) reduces neither; you pay income tax and FICA on the full amount now, in exchange for tax-free withdrawals later. An HSA contribution made through payroll is the one deduction that reduces federal, state, and FICA taxable wages simultaneously, which is why payroll HSA contributions are often described as having a bigger paycheck-level benefit than the same contribution made on your own after the fact.

Reading the year-to-date columns

Most stubs run two columns for every line: the current period and year-to-date (YTD). The YTD column is the one worth checking periodically, for two reasons. First, it's how you catch a payroll error early: if YTD federal withholding looks wildly out of step with your gross YTD earnings partway through the year, that's worth a question to HR before it compounds over more pay periods. Second, it's how you'd notice you're approaching the Social Security wage cap if you have a high income; once YTD Social Security wages cross that threshold, the 6.2% line should stop appearing on your remaining paychecks for the year, and it's a useful sanity check that your employer's system caught the change.

A worked example

Here's a simplified biweekly stub for someone earning $65,000 a year, paid 26 times, contributing 5% to a traditional 401(k) and $50 per paycheck to an HSA through payroll. The federal and state withholding figures below are illustrative round numbers, not a lookup from current IRS tables. Your actual withholding depends on your W-4 and the tables in effect when you're paid, so treat the mechanism here as the lesson, not the dollar amount.

• Gross pay: $2,500.00
• 401(k) deferral (5%, pre-tax): −$125.00
• HSA contribution (payroll, pre-tax): −$50.00
• Wages subject to FICA: $2,450.00 (gross minus the HSA deduction only)
• Social Security (6.2% of $2,450): −$151.90
• Medicare (1.45% of $2,450): −$35.53
• Wages subject to federal/state income tax: $2,325.00 (gross minus 401(k) and HSA)
• Federal income tax withheld (illustrative): −$205.00
• State income tax withheld (illustrative, 4% flat assumption): −$93.00
• Net (take-home) pay: $1,839.57

Notice that the 401(k) deferral lowered the income-tax base but not the FICA base, while the HSA lowered both. That's not an accounting quirk. It's the actual rule, and it's why maximizing an HSA before a taxable brokerage account is often recommended for people with a high-deductible health plan.

Decision framework: how to check your own withholding is roughly right

You don't need to recompute IRS tables by hand. You need three checks:

Check your last tax return's result. A large refund means you overpaid all year and gave the government an interest-free loan; owing a large balance (plus a possible penalty) means you underpaid. Either extreme is a signal to adjust your W-4, not just something to shrug off.

Run the IRS Tax Withholding Estimator whenever your situation changes: new job, marriage, a second income, a big raise, a new dependent. It's built specifically to translate your real numbers into a W-4 adjustment, and it's more reliable than guessing.

Compare your FICA line to the flat rates. If your paycheck shows something other than roughly 6.2% and 1.45% of your FICA-taxable wages (before you've hit the Social Security cap for the year), ask payroll. That's a fixed calculation, not a judgment call, so a mismatch usually means a data error, not a legitimate variation.

Limits and exceptions

This teardown assumes a standard W-2 employee on salary or hourly wages. It doesn't directly apply if you're a 1099 independent contractor: no taxes are withheld from contractor pay at all, and you're responsible for quarterly estimated payments, including the full 15.3% self-employment tax (both the employee and employer halves of FICA) rather than splitting it with an employer. Bonuses and other supplemental wages are often withheld at a flat federal rate rather than your regular table rate, which is why a bonus check sometimes looks over-taxed relative to your normal paycheck. It usually evens out at tax filing time, not necessarily on that check. And if you hold multiple jobs at once, each employer withholds as if it were your only income, which commonly under-withholds for Social Security purposes and is worth checking with the estimator above.

Hourly employees add one more wrinkle: overtime pay (typically time-and-a-half past 40 hours in a week under federal rules, though some states set stricter thresholds) is still just wages for tax purposes, taxed the same way as regular hours: there's no special "overtime tax rate," even though a big check with a chunk of overtime in it can land in a higher withholding bracket for that one paycheck, which sometimes gets misread as the overtime itself being taxed more heavily. It usually isn't; it's a temporarily higher-looking paycheck being withheld as if every paycheck were that size.

None of this replaces a real conversation with a tax professional if your situation is complicated: multi-state income, equity compensation, or self-employment income on the side all add wrinkles this article doesn't cover. What it should do is turn your pay stub from a black box into a document you can actually check line by line. For the bigger picture of where that take-home pay should go once it lands, see how to build a budget and where your cash should live.