Understanding Your Paycheck
What Gets Deducted from Your Paycheck?
Your gross salary is not what you take home. Several mandatory and voluntary deductions reduce your paycheck:
1. Federal Income Tax
Based on your income, filing status, and W-4 allowances. Uses the 2024 federal tax brackets (10-37%). Your employer withholds an estimated amount each pay period.
2. FICA Taxes (Social Security & Medicare)
- Social Security: 6.2% up to $160,200 wage base (2024)
- Medicare: 1.45% on all wages
- Additional Medicare: 0.9% on income over $200,000 (single)
- Total FICA: 7.65% for most employees
3. State Income Tax
Varies by state. Nine states have no income tax:
- Alaska, Florida, Nevada, New Hampshire
- South Dakota, Tennessee, Texas, Washington, Wyoming
Highest state income tax rates (2024):
- California: 13.3%
- New York: 10.9%
- New Jersey: 10.75%
- Hawaii: 11%
4. 401(k) Contributions
- 2024 Limit: $23,000 ($30,500 if age 50+)
- Tax Benefit: Reduces taxable income (pre-tax contributions)
- Employer Match: Free money - always contribute enough to get full match
- Roth 401(k): After-tax contributions, tax-free withdrawals in retirement
Pay Frequency Comparison
| Frequency | Paychecks/Year | Example ($60k Salary) |
|---|---|---|
| Weekly | 52 | $1,154 per paycheck |
| Bi-Weekly | 26 | $2,308 per paycheck |
| Semi-Monthly | 24 | $2,500 per paycheck |
| Monthly | 12 | $5,000 per paycheck |
💰
Bi-Weekly Advantage
If paid bi-weekly, you receive 26 paychecks per year. That means 2 months have 3 paychecks! Use these "extra" paychecks for savings, debt payoff, or investments.
How to Optimize Your W-4
Your W-4 form determines how much federal tax is withheld from your paycheck. Changes in 2020 eliminated allowances and use a more accurate system.
- Claim Dependents: Reduces withholding if you have qualifying children
- Multiple Jobs: Use IRS worksheet to avoid under-withholding
- Extra Withholding: Add amount if you expect to owe taxes
- Reduce Withholding: If you consistently get large refunds
💡 Smart Strategy
Getting a large tax refund means you gave the IRS an interest-free loan all year. Adjust your W-4 to keep more money in your paycheck and invest it throughout the year instead.
Common Paycheck Deductions
- Health Insurance: Pre-tax deduction (lowers taxable income)
- Dental/Vision Insurance: Pre-tax deduction
- HSA Contributions: Triple tax advantage (2024 limit: $4,150 individual)
- FSA Contributions: Pre-tax for medical expenses ($3,200 limit)
- Life Insurance: First $50,000 coverage is tax-free
- Disability Insurance: May be pre-tax or after-tax
Take-Home Pay by State (Example: $75,000 salary)
| State | Take-Home Pay | Effective Tax Rate |
|---|---|---|
| Texas (No State Tax) | $58,000 | 22.7% |
| Pennsylvania | $56,200 | 25.1% |
| New York | $54,800 | 26.9% |
| California | $54,100 | 27.9% |
Maximizing Your Take-Home Pay
- Contribute to HSA: Reduces taxable income + builds medical fund
- Max Out 401(k): Every $1,000 contributed saves $220-370 in taxes
- Commuter Benefits: Pre-tax transit/parking (up to $315/month)
- Dependent Care FSA: Pre-tax childcare expenses (up to $5,000)
- Review W-4 Annually: Adjust for life changes (marriage, kids, home purchase)
Understanding Your Pay Stub
Key sections on your pay stub:
- Gross Pay: Total earnings before deductions
- Pre-Tax Deductions: 401(k), HSA, insurance (reduce taxable income)
- Taxable Gross: Gross pay minus pre-tax deductions
- Taxes: Federal, state, local, FICA
- After-Tax Deductions: Roth 401(k), life insurance, garnishments
- Net Pay: Your take-home amount
- YTD Totals: Year-to-date earnings and deductions