How Paycheck Deductions Work

By Khaled Mahmud · October 28, 2026 · 5 min read

Your pay stub says you earned one number, but your bank account shows a smaller one. That gap is not a mistake — it is a stack of deductions that come out of every paycheck before you ever see the money. Understanding each one is the difference between guessing at your budget and actually knowing what you will take home.

This guide breaks down the five buckets that shrink a paycheck, then works through a complete example with real numbers so you can compare it line by line with your own stub.

Gross pay vs net pay

Gross pay is everything you earned in the pay period: hourly rate times hours worked, plus any overtime, bonuses, or commissions. Net pay — your take-home pay — is gross pay minus all deductions. Every deduction falls into one of two groups: mandatory taxes you cannot opt out of, and voluntary deductions you chose, like retirement savings or health insurance premiums.

The five buckets, one by one

1. Federal income tax. This is the biggest deduction for most workers. The amount depends on your income, your filing status, and the information on your Form W-4. The United States uses a progressive system, which means different slices of your income are taxed at different rates — not your whole paycheck at one rate. In the example below we use a flat 12% only to keep the arithmetic easy to follow; your real withholding will differ.

2. Social Security tax: 6.2%. This funds retirement and disability benefits. It applies to your wages up to an annual wage cap set by law, which changes over time, so very high earners stop paying it partway through the year.

3. Medicare tax: 1.45%. This funds health coverage for people 65 and older. Unlike Social Security, it has no wage cap, so it applies to all of your wages. Together, Social Security and Medicare are often labeled FICA on your stub, at a combined 7.65%.

4. State income tax. Most states take their own slice, and the method varies: some use a flat rate, some use brackets like the federal system, and a few states have no income tax at all. In our example we use Michigan's flat 4.25% rate as an illustration — rates change, so check your own state's current rate.

5. Voluntary deductions. These are choices, not taxes: a 401(k) or other retirement contribution, health insurance premiums, dental or vision coverage, and sometimes union dues or a flexible spending account. Pre-tax deductions like a traditional 401(k) reduce your taxable income, which is one reason they are popular — but they still reduce the cash that lands in your account.

Worked example: a biweekly paycheck

Meet Dana, who earns $28 per hour and works 40 hours a week, paid every two weeks. That is 80 hours per pay period.

Gross pay: 80 hours × $28 = $2,240.00
Federal income tax (12% illustration): $2,240 × 0.12 = $268.80
Social Security (6.2%): $2,240 × 0.062 = $138.88
Medicare (1.45%): $2,240 × 0.0145 = $32.48
State income tax (4.25% illustration): $2,240 × 0.0425 = $95.20
Total deductions: $268.80 + $138.88 + $32.48 + $95.20 = $535.36
Net pay: $2,240.00 − $535.36 = $1,704.64

The takeaway

Dana keeps about 76 cents of every dollar earned in this example ($1,704.64 ÷ $2,240 = 0.761, or 76.1%). Nearly a quarter of the paycheck goes to taxes before any voluntary deduction. Add a 5% 401(k) contribution ($112.00) and the take-home figure would fall to about $1,592.64 — lower cash today, but money working for retirement.

Why two people with the same pay take home different amounts

Same hourly rate, different net pay — it happens all the time. The reasons are usually one of these: different W-4 settings, different states, different benefit choices, or different pay frequencies. Someone in a state with no income tax keeps more than someone in a high-tax state. Someone contributing 10% to a 401(k) takes home less cash now but keeps more of it long-term. And overtime changes the picture too, because those extra hours are taxed just like regular hours.

Common mistakes to avoid

Budgeting on gross pay. Rent, car payments, and savings plans should be built around net pay — the money that actually arrives.
Ignoring the W-4. Life changes (a new job, marriage, a second income) change your withholding. Reviewing the form once a year prevents an April surprise.
Forgetting pay frequency. A $2,240 biweekly gross is not $4,480 a month — it is $4,480 in most months but $5,600 in the two months each year with three paychecks, and $58,240 a year ($2,240 × 26 pay periods).
Treating a tax refund as a bonus. A big refund usually means you overpaid all year. Adjusting your W-4 puts that money in your paychecks instead.

Run your own numbers:

Paycheck Calculator

Frequently asked questions

Why is my take-home pay less than my hourly rate times my hours?

Because several deductions come out before you are paid: federal income tax, Social Security, Medicare, usually state tax, and any benefits or retirement contributions you chose. Gross pay is what you earned; net pay is what is left after those deductions.

What is FICA on my pay stub?

FICA is the federal payroll tax that funds Social Security and Medicare. In the example in this guide it is 6.2% for Social Security plus 1.45% for Medicare, for a combined 7.65% of your gross pay. Your employer pays a matching amount separately.

Can I change how much tax is withheld?

Yes, within limits. You adjust it by filing a new Form W-4 with your employer. Claiming the right allowances matters: too little withheld and you may owe tax in April; too much and you are giving the government an interest-free loan until your refund arrives.

Educational note: this guide explains the math for learning purposes only and is not financial, tax, or legal advice. Tax rates and rules change, and your own situation may differ — check current rules for your state or talk to a qualified professional before making a money decision.