Understanding Your Paycheck: Where the Money Goes
Your salary is $75,000. Your first paycheck is $1,900 instead of the $2,884 you mentally divided by 26. Where did the rest go? Understanding the gap between gross pay and net pay — and the differences between deductions, taxes, and withholdings — is worth an hour of your time, because the numbers add up to thousands per year.
Gross vs. net
Gross pay is what you earn before anything is taken out. Net pay is what actually lands in your account. The gap between them comes from three buckets: federal taxes, state and local taxes, and other deductions.
Federal taxes: income + FICA
Two separate federal taxes come out of every paycheck. Federal income tax is progressive — different portions of your income are taxed at different rates (10%, 12%, 22%, and so on). FICA is a flat 7.65% of your gross pay, split between Social Security (6.2%) and Medicare (1.45%). FICA has an income cap for Social Security but Medicare applies to everything.
State and local taxes
Nine US states have no state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming). The rest range from a flat rate (like 5% in Massachusetts) to progressive brackets that can exceed 13% (California). Some cities, like New York City, add their own income tax on top.
Pre-tax deductions
Contributions to a traditional 401(k), a Health Savings Account (HSA), or certain insurance premiums come out of your paycheck before federal tax is calculated. That means every dollar you contribute reduces your taxable income by a dollar. If you're in the 22% federal bracket, a $100 401(k) contribution costs you only $78 in take-home pay — the government subsidizes the rest.
This is why financial planners push 401(k) contributions so hard: the tax savings are immediate and substantial. Contributing 10% of a $75,000 salary reduces your take-home by less than 8%.
Post-tax deductions
Roth 401(k) contributions, some life insurance premiums, and wage garnishments come out after tax. They don't reduce your taxable income, but they reduce your take-home. Worth knowing which bucket each deduction falls into, because the effective cost differs.
Withholding vs. actual tax
What your employer withholds is an estimate. If you're over-withheld, you get a refund at tax time. If you're under-withheld, you owe. The goal isn't to get a big refund — that's an interest-free loan to the government — it's to be roughly even. Adjust your W-4 if you're consistently off by more than a few hundred dollars either way.
The number that actually matters
When comparing job offers or planning a budget, focus on net pay, not gross. A $70,000 salary in a no-income-tax state can beat a $75,000 salary in a high-tax state after all deductions. And the size of your paycheck is not a moral score — it's just what's left after the rules are applied. A salary calculator helps you compare offers properly before you sign anything.