Reading your paycheck, line by line

A paycheck answers a question nobody asks out loud: where the rest of it went. The figure on the offer letter is annual and gross. The figure that reaches the bank is that number after a payroll system has applied around eight subtractions in a fixed sequence — and the sequence is what makes the gap so hard to reconstruct from memory.

Most stubs use the same skeleton whatever the provider. Gross earnings at the top, deductions in the middle, net pay at the bottom, and a year-to-date column beside every line. The middle block is the part worth learning, because it holds three different kinds of subtraction: taxes you cannot negotiate, a tax you partly control through a form, and deductions you chose. Each is computed on a different base, which is the single fact that makes a stub legible.

Order of operations, and why it matters

Pre-tax deductions come out before the taxes, and they shrink the wage figures the taxes are computed on. But not every pre-tax deduction shrinks every base, and that asymmetry is where most confusion starts.

Deductions run through an employer's cafeteria plan — medical, dental and vision premiums, health savings account contributions, flexible spending accounts, sometimes commuter benefits — escape federal income tax and Social Security and Medicare. A traditional 401(k) or 403(b) deferral escapes federal income tax only; Social Security and Medicare are charged on the money before it is deferred. So a stub carries at least two different taxable-wage figures, and neither equals gross minus all deductions.

That is not a technicality. A dollar into a health savings account through payroll avoids 7.65% that the same dollar deferred into a retirement plan pays, and the retirement dollar never gets it back — payroll tax is charged going in, not on the way out. It is the strongest argument for funding health accounts through the employer rather than contributing directly and deducting at filing.

Federal withholding is an estimate you control

Federal income tax withholding is not a rate. It is a per-period estimate: payroll takes this period's federal taxable wages, annualizes them as if every remaining period looked identical, applies the tables to the result, subtracts credits, and divides back down. Everything odd about withholding follows from that assumption.

The form driving it no longer uses allowances. It collects filing status, an adjustment for a second job or a working spouse, a dollar amount for dependent credits, estimates of other income and deductions, and a flat extra amount per period. That last field is the useful one: it is the only input that changes withholding by a predictable dollar figure rather than through a calculation you cannot see.

Two situations break the annualization badly. A mid-year raise or a bonus is treated as though the new, higher pay rate had applied all year, so withholding overshoots on that check. And in a two-earner household each employer withholds as if its job were the only income, which lands the combined return in a higher bracket than either payroll system assumed — the classic April shortfall, and the reason the multiple-jobs step exists. If the gap between what a payroll system assumes and what you actually owe is unclear, the difference between a marginal and an average rate is the concept doing the work.

FICA: the two taxes the form cannot touch

Social Security and Medicare are charged at fixed statutory rates with no personal inputs at all. Social Security takes 6.2% of covered wages up to an annual wage base that resets each January. Medicare takes 1.45% with no ceiling whatsoever, plus an extra 0.9% once your wages from a single employer pass $200,000 in a year — a threshold Congress wrote into statute and never indexed, so it captures steadily more people over time. Your employer matches the 6.2% and the 1.45%, but not the additional 0.9%.

The wage base is what produces the most confusing pay stub of anyone's year. Take someone paid $10,000 twice a month whose year-to-date wages cross the base partway through a period, with $4,000 of that period's pay still below it:

Take-home rises by $620 a period for the rest of the year, then falls back by the same amount on the first check of January. Nothing changed about the job — it is a calendar artifact, and treating the autumn increase as a permanent raise is a reliable way to start the new year short.

One more mechanical detail worth knowing: the wage base is tracked per employer, not per person. Change jobs in the second half of a year after already crossing it and the new employer restarts at zero, withholding 6.2% again on wages that were already taxed. You claim your excess back as a credit at filing. The employers' matching halves are gone.

Run your numbersFICA tax calculator→

State, local, and the lines that only look like tax

Below the federal lines sits whatever your state does, and the variation is wide. Some states levy no tax on wage income at all. Some apply a single flat rate. Others run brackets and require their own withholding certificate, separate from the federal form — filling out one and not the other is a common cause of a state balance due alongside a federal refund.

Local income taxes exist in a minority of states and are usually assessed by a city, county or school district. They are small in percentage terms and easy to miss on a stub. Alongside them sit employee-paid state programs — disability insurance, paid family leave, long-term care — that appear as separate deductions, are not income tax, and are not refundable through the return. Note too that a handful of states decline to follow the federal treatment of health savings accounts, taxing contributions on the state return that were pre-tax federally.

Gross to net, one period in full

Here is a full semi-monthly stub for a salary of $84,000, which is $3,500 per period across 24 pay dates. The federal and state figures below are illustrative; every other line is exact arithmetic on the ones above it.

Two bases are doing all the work. Social Security and Medicare are charged on $3,220 — gross less the cafeteria-plan lines, but including the retirement deferral. Income tax is charged on $3,010, which is $210 lower. Net pay is 65% of gross, and only about half of the missing third is tax: of the $1,221.73 that vanished, $647.73 went to government, $380.00 went into accounts that are still the employee's, and $194.00 bought insurance.

That distinction is worth making every time someone says a third of their pay disappears. Check the gross line against what you actually agreed to first — the salary converter turns an hourly rate or an annual figure into the per-period number your stub should show, and a mismatch there is a payroll error, not a tax question.

After-tax deductions, and the line you never receive

Anything below the tax lines reduces net without reducing any tax: Roth deferrals, after-tax insurance premiums, union dues, stock purchase plan contributions, loan repayments, garnishments and support orders. Moving a deduction from the after-tax block to the pre-tax block, where the plan allows it, is worth your marginal rate on every dollar moved.

Imputed income runs the other way and confuses people the most. Employer-paid group term life coverage above $50,000, health coverage for a non-dependent partner, and personal use of a company vehicle are all added to taxable wages and then subtracted back out, because you never receive the money. Net pay does not move; the taxes above it do. A stub that shows a benefit added and removed on adjacent lines is working correctly.

Sanity-checking the withholding

Three checks catch nearly everything, and all three use the year-to-date column.

Start with the two you can verify exactly. Year-to-date Social Security should equal 6.2% of year-to-date Social Security wages, and Medicare 1.45% of Medicare wages, to the penny. If either is off by more than rounding, a pay code is misclassified — that is a payroll ticket, not a tax question, and it is easier to fix in March than at filing.

Then project the federal line. Divide year-to-date withholding by periods elapsed, multiply by the full period count, and compare the result against the tax you actually expect to owe on the year — the income tax calculator will produce the second figure. A shortfall found early is spread across many periods; the same shortfall found in November has to be recovered from two.

Last, check the deductions you chose. Year-to-date retirement contributions should be on pace to hit the annual limit near the final pay date rather than in September, because a plan that matches per period stops matching once you stop contributing — how a 401(k) actually works covers the match cadence and the vesting schedule that decides how much of it you keep. And after a raise lands, compare the new net against the old one before deciding what it bought you: whether a raise beat inflation is a question about take-home pay, not the announced percentage.