Your employer agrees to pay you $60,000 a year. Your paycheck arrives and it is $1,950, not the $2,307 you expected. Where did $357 go? The answer is on your pay stub -- a document most people glance at and file away without understanding. Every line is a percentage of your gross pay that goes somewhere specific, and knowing where your money goes is the first step to managing it better.
Gross Pay vs Net Pay
Gross pay is what you earn before any deductions. Net pay (also called "take-home pay") is what actually hits your bank account. The difference between the two is the sum of all deductions, which are a combination of taxes you legally owe, benefits you have opted into, and any voluntary contributions you have chosen.
For most full-time employees in the U.S., net pay runs roughly 70-80% of gross pay. Someone earning $5,000 per month gross typically takes home $3,500-$4,000 after all deductions. The exact amount depends on your tax situation, benefits elections, and whether you contribute to a 401(k) or other pre-tax accounts.
FICA Taxes: Social Security and Medicare
FICA (Federal Insurance Contributions Act) taxes are mandatory and flat-rate. Every employed person in the U.S. pays them regardless of income level.
Social Security tax: 6.2% of gross wages, up to the annual wage base limit ($168,600 in 2024). On a $5,000 monthly paycheck, this is $310. Your employer pays another 6.2% on your behalf, totaling 12.4%.
Medicare tax: 1.45% of gross wages, with no income cap. On a $5,000 paycheck, this is $72.50. High earners (over $200,000 single / $250,000 married) pay an additional 0.9% Additional Medicare Tax on income above those thresholds.
Combined, FICA taxes take 7.65% from every paycheck for most workers. On a $5,000 gross monthly check, that is $382.50 before income taxes are even considered.
Federal Income Tax Withholding
Federal income tax is the largest and most variable deduction. Unlike FICA, the amount withheld depends on your income level, filing status (single, married, head of household), and any allowances or adjustments you specified on your W-4 form when you started your job.
The U.S. uses a progressive tax bracket system, meaning different portions of your income are taxed at different rates. In 2024, the brackets for single filers are: 10% on the first $11,600, 12% on income from $11,601 to $47,150, 22% on income from $47,151 to $100,525, and higher rates above that.
It is important to understand that these are marginal rates -- you do not pay 22% on all your income, only on the portion that falls in that bracket. Someone earning $60,000 single pays 10% on the first $11,600, 12% on the next $35,550, and 22% on the remaining $12,850. Their effective federal tax rate is around 13-14%, not 22%.
Your employer withholds an estimated amount each paycheck based on your W-4 settings. At year-end, your actual tax liability is calculated on your return. If too much was withheld, you get a refund. If too little, you owe the difference.
State Income Tax
State income tax varies enormously by location. Nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. States with income tax range from a flat 3% (some states use a flat rate) to progressive systems that top out above 10% in California, Hawaii, and New Jersey.
For a $60,000 earner in a moderate-tax state like Colorado (4.4% flat rate), state income tax withholding is about $220 per month. In a high-tax state like California, it could be $300-$400 per month at the same income level.
Pre-Tax Deductions: 401(k), HSA, FSA, and Health Insurance
Some deductions come out before taxes are calculated, which is what makes them valuable. These are called pre-tax deductions.
401(k) contributions reduce your taxable income dollar for dollar. If you contribute 6% of a $5,000 gross monthly check ($300), you only owe federal and state income tax on $4,700 -- saving you roughly $66-90 in taxes depending on your bracket, plus getting the $300 invested for retirement.
Health insurance premiums paid through employer-sponsored plans are typically pre-tax. If your employer-sponsored plan costs $150 per month from your paycheck, that $150 reduces your taxable income.
HSA (Health Savings Account) contributions are triple-tax-advantaged: contributions are pre-tax, growth is tax-free, and withdrawals for medical expenses are tax-free. The 2024 HSA contribution limit is $4,150 for self-only coverage.
FSA (Flexible Spending Account) contributions are also pre-tax but have a use-it-or-lose-it rule -- money not spent by year-end is forfeited (with some exceptions for small carryover amounts).
Calculating Your Effective Tax Rate
Your effective tax rate is the actual percentage of your gross income that goes to taxes. It is lower than your marginal rate (highest bracket rate) because of how progressive brackets work.
Effective tax rate = Total taxes paid / Gross income x 100
Example: Someone earning $70,000 annually pays roughly $8,000 in federal income tax, $4,340 in Social Security, and $1,015 in Medicare. Total federal taxes: $13,355. Effective federal rate: ($13,355 / $70,000) x 100 = 19.1%. Add state taxes and the effective total tax burden is typically 22-26% for this income level.
After-Tax Deductions
Some deductions come out after taxes are calculated. These do not reduce your tax bill, but they may still be valuable. Roth 401(k) contributions are after-tax -- you pay tax now, but withdrawals in retirement are completely tax-free. Life insurance premiums above a certain employer-provided amount are often after-tax. Wage garnishments for child support or court judgments are after-tax deductions.
A Complete Pay Stub Breakdown
For a single employee earning $5,000 gross per month with standard elections in a moderate-tax state, a typical breakdown might look like: Gross pay: $5,000. Federal income tax withheld: -$500 (10%). Social Security: -$310 (6.2%). Medicare: -$72.50 (1.45%). State income tax: -$150 (3%). 401(k) contribution (6%): -$300. Health insurance premium: -$150. Net pay: approximately $3,517.50 (70.4% of gross).
Every number on that stub is a percentage problem. Knowing the percentages lets you quickly spot errors -- if Social Security suddenly drops from 6.2% to 4.2% of your check, something is wrong. It also helps you make better decisions: increasing your 401(k) contribution by 1% costs you less in net pay than the full 1%, because the pre-tax contribution also reduces your income tax withholding.