Reading Your Paycheck, From Gross to Net

The salary on an offer letter is not the money you live on. Between your gross pay and the deposit in your bank account sit taxes you cannot avoid, deductions you chose once and may have forgotten, and a withholding estimate that may be wrong in either direction. Most people never read the stub closely, and it costs them in three ways: an employer match left unclaimed, tax-advantaged accounts left empty, and a year of over- or under-withholding. This chapter walks down a pay stub line by line, separates what you control from what you do not, and shows where a few minutes of attention change your take-home pay.

From gross to net: the order of the lines

A pay stub follows the same order almost everywhere.

Social Security and Medicare together are often shown as FICA. Your employer pays a matching 7.65% on top of your pay that never appears on your stub. If you are self-employed, you pay both halves yourself, which is why self-employment tax is 15.3%.

The order matters because of what each pre-tax deduction skips. A traditional 401(k) contribution is taken before federal and most state income tax, but Social Security and Medicare are still charged on it. Health premiums, HSA contributions and commuter benefits taken through a cafeteria plan skip all three. That makes an HSA through payroll the most tax-efficient dollar on most stubs.

What pre-tax saving does to your tax

Here is a single filer earning a salary of $80,000, first with no pre-tax deductions, then contributing 6% of pay to a traditional 401(k).

Without the contribution, federal income tax for the year is $8,770. With 6% of pay going into the 401(k), taxable wages fall to $75,200 and the tax falls to $7,714. Because this filer's top bracket is 22.0%, each pre-tax dollar costs about 78 cents of take-home pay, before any state tax saving. The money is not gone; it is in an account you own, to be taxed when you withdraw it in retirement.

Each account has a yearly limit. In 2026 you can defer up to $24,500 of your own pay into a 401(k) or 403(b), with more allowed from age 50. An HSA, which you can only contribute to if you are covered by a qualifying high-deductible health plan, allows $4,400 for self-only coverage or $8,750 for family coverage, with employer contributions counting toward the limit. Health care and dependent care FSAs and commuter benefits have their own limits, set each year; your benefits portal lists the current ones. A health FSA is mostly use-it-or-lose-it, so fund it only with spending you are confident of.

The employer match: pay you only get if you ask

Many employers add money to your 401(k) when you contribute. A common formula matches 50% of what you put in, on contributions up to 6% of pay. Contribute 6% and the employer adds 3% of your salary. Contribute 3% and you get only 1.5%. The match is part of your compensation, and it is the one piece you have to opt into.

On the salary above, a 50% match up to 6% is worth 3% of pay, about $200 a month. Invested for a career, that adds up.

Over 30 years, match contributions of $72,000 could grow to about $233,891 at a steady 7.0% a year. That is the cost of contributing a little less than the match requires. Two details change the real value: vesting, which may mean employer money becomes yours only after a period of service, and per-paycheck matching, which can lose match if you hit the yearly limit early unless the plan makes a year-end true-up. Your plan's summary plan description states both. The 401(k) contribution and match calculator shows what you collect at your current rate and what you leave behind.

Withholding: getting the estimate right

Federal income tax on your stub is a prediction, not a bill. Your employer calculates it from the Form W-4 you filed. Since 2020 the form no longer uses allowances; it asks for your filing status, whether you hold more than one job or your spouse works, the credits you expect for dependents, and any other income or deductions you want reflected. Many people filled it in on their first day and never looked again.

A large refund every spring means you lent money to the government all year at no interest. A large balance due means the opposite, and if the shortfall is big enough you can owe an underpayment penalty. The IRS generally does not charge that penalty if your withholding and estimated payments covered at least 90% of this year's tax, or 100% of last year's tax (110% if your income is higher). A refund or balance due close to zero is the sign of a well-set W-4.

Revisit the form when something changes: marriage or divorce, a child, a second job or side income, a spouse starting or stopping work, or a big change in deductions. The IRS Tax Withholding Estimator takes your most recent stub and tells you what to enter.

Bonuses are withheld differently. Employers can withhold a flat 22% of federal tax on a bonus or other supplemental pay, rising to 37% on supplemental pay above $1,000,000 in a year. That is a withholding rate, not the tax you owe. If your actual bracket is lower, part comes back at filing; if higher, you owe more. The bonus tax calculator estimates the difference.

A yearly paycheck review

Open enrollment and the first pay stub of each year are the two natural moments to check the whole picture.

• Match. Is your contribution rate at least the rate that earns the full match?
• Health plan. Did you compare a high-deductible plan with an HSA against a traditional plan, using your expected care, not last year's habit? The HDHP vs PPO calculator runs the comparison.
• HSA and FSA. Are you contributing through payroll rather than on your own, so the money also skips payroll tax?
• Withholding. Was last year's refund or balance due small?
• Every line. Do you recognize each deduction, and is each one still something you want?