Gross Pay vs Net Pay: What's Taken Out of Your Paycheck

Gross Pay vs Net Pay

Gross pay is your total compensation before any deductions — your salary or hourly wage times hours worked. Net pay (take-home pay) is what you actually receive after all taxes and deductions are subtracted. For most employees, net pay is 70–80% of gross pay, depending on tax situation and benefits elections.

Federal Income Tax Withholding

Your employer withholds federal income tax based on your W-4 form elections and the IRS withholding tables. The amount withheld approximates what you'll owe in federal taxes for the year. Your W-4 (redesigned in 2020) uses dollar amounts for adjustments rather than allowances. Filing status, number of jobs, and any additional withholding you specify all affect this amount.

FICA (Federal Insurance Contributions Act) taxes are fixed-rate deductions:

Social Security tax: 6.2% of wages up to the wage base ($176,100 in 2026). Your employer matches this 6.2%.
Medicare tax: 1.45% of all wages with no limit. Your employer matches 1.45%.
Additional Medicare tax: 0.9% on wages above $200,000 (single) / $250,000 (married). No employer match.

Together, you pay 7.65% in FICA on most wages. Self-employed individuals pay the full 15.3% (both employee and employer share), though they can deduct half of it.

Pre-Tax Deductions That Reduce Your Taxable Income

Some paycheck deductions are taken before taxes are calculated, reducing your taxable income:

401(k) / 403(b) traditional contributions: Reduces federal and most state income tax (but not FICA)
Health insurance premiums (employer plans): Typically pre-tax under Section 125 cafeteria plan
HSA contributions: Triple-tax advantaged — pre-tax going in, tax-free growth, tax-free for medical use
Dependent care FSA: Pre-tax for childcare expenses up to $5,000/year

State and Local Taxes

Most states levy income tax withheld similarly to federal tax. Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Some cities (New York City, Philadelphia, etc.) have local income taxes on top of state taxes.

How to Adjust Your W-4

If you consistently owe a large tax bill or get a large refund, update your W-4. Getting a large refund means you over-withheld — you gave the government an interest-free loan. Adjust your W-4 to have less withheld and invest that extra money instead. If you owe significantly, increase withholding to avoid underpayment penalties.

Frequently Asked Questions

Why is my take-home pay so much less than my salary?

Federal income tax, Social Security (6.2%), Medicare (1.45%), state income tax, and benefit premiums (health insurance, 401k contributions) all reduce take-home pay. Combined, these typically reduce gross pay by 20–35% for middle-income earners. A $60,000 salary often results in $42,000–$48,000 take-home pay depending on state and benefit elections.

Do pre-tax 401(k) contributions reduce my paycheck?

Yes, but by less than you might expect. A $500 401(k) contribution typically reduces your take-home pay by only $350–$400 because it also reduces your federal and state income tax withholding. The tax savings partially offset the contribution. This makes 401(k) contributions more affordable than they appear from the gross amount.

What is FICA and can I avoid it?

FICA stands for Federal Insurance Contributions Act — it funds Social Security and Medicare. Employees cannot opt out. The only exception is certain student employees, religious workers, and specific government employees covered by alternative retirement systems. Self-employed individuals pay the self-employment tax (15.3%), which is the combined employee and employer FICA share.