How to Read Your Pay Stub

Gross pay vs. net pay

Gross pay is what you earned. Net pay (take-home pay) is what you received after taxes and deductions. The gap between them — which surprises many first-time employees — comes from five categories of withholding.

Federal income tax withholding

The largest deduction for most workers. Your employer withholds federal income tax based on your W-4 — specifically your filing status and any additional withholding you specified. The IRS provides withholding tables that tell employers how much to take per pay period based on annualized income.

If your withholding is too high, you get a refund in April. Too low, and you owe. You can adjust withholding at any time by submitting a new W-4 to your employer. The W-4 withholding estimator calculates exactly what you should set.

FICA: Social Security and Medicare

These are flat-rate taxes set by law, not by your W-4:

• Social Security: 6.2% of gross wages, up to the annual wage base ($176,100 in 2025). Once you hit that ceiling mid-year, this deduction stops.
• Medicare: 1.45% of all gross wages, no cap. An additional 0.9% applies to wages above $200,000 (single) or $250,000 (MFJ) — your employer withholds this automatically above $200,000 regardless of filing status.

Your employer matches both contributions — the true FICA cost to your employer is 7.65% of your wages, but only your half appears on your pay stub.

State and local income tax

Most states with an income tax withhold it alongside federal. The rate and calculation vary by state — some use flat rates (Illinois: 4.95%), others use progressive brackets (California: up to 13.3%). Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. Use the state income tax calculator to see your state's effective rate on your income.

Pre-tax deductions (these reduce your taxable income)

These are deducted from gross pay before taxes are calculated, which is what makes them valuable:

• 401(k) / 403(b) contributions: Reduce federal and state taxable income. If you contribute $500/pay period and you're in the 22% bracket, you only "feel" $390 of that deduction.
• Health insurance premiums: Employer-sponsored plans are typically pre-tax under a Section 125 cafeteria plan.
• HSA contributions: Triple tax-advantaged — pre-tax in, grows tax-free, tax-free for qualified medical expenses.
• Dependent care FSA: Up to $5,000/year pre-tax for childcare costs.

Post-tax deductions (these do not reduce taxable income)

• Roth 401(k) contributions: Taxed now, tax-free in retirement.
• Life or disability insurance premiums not covered by the Section 125 plan.
• Wage garnishments (child support, court orders).

Why your effective tax rate is lower than your bracket

Your W-2 income is not all taxed at your marginal rate. The first $11,925 (single, 2025) is taxed at 10%, the next slice at 12%, and so on. Your effective rate — total tax divided by total income — is always lower than your top bracket. The effective vs. marginal rate calculator shows the exact breakdown for any income level.

Checking your pay stub for errors

Compare year-to-date totals on each pay stub to what you expect: - Social Security should be 6.2% of YTD gross until you hit the wage base. - Medicare should be exactly 1.45% of all YTD gross. - Federal withholding should align with what the W-4 estimator projects for your annual income.

If anything looks off, payroll errors do happen — bring the discrepancy to HR with the specific line and expected amount.