Most people are surprised by how much smaller their paycheck is compared to the salary they were offered. That gap is taxes and deductions — and understanding exactly what’s coming out, and why, makes it a lot easier to budget realistically and plan for tax time. This guide explains every major item that reduces your paycheck, in plain English.
Quick answer: what comes out of a paycheck?
Your gross pay (the amount you’re paid before anything is taken out) gets reduced by:
- Federal income tax
- State income tax (in most states)
- Social Security tax (6.2%)
- Medicare tax (1.45%)
- Health insurance premium (your share)
- 401(k) or retirement contributions (if you’re contributing)
- Other voluntary deductions (FSA, dental, vision, life insurance, etc.)
What’s left after all of that is your net pay — the amount that actually hits your bank account. See Gross Pay vs. Net Pay for the full picture.
Federal income tax
Federal income tax is the largest single deduction for most workers. The U.S. uses a progressive tax system, meaning different portions of your income are taxed at different rates. In 2025, the brackets for single filers start at 10% on the first roughly $11,000 of taxable income, then step up through 12%, 22%, 24%, and higher for larger incomes.
The amount withheld from each paycheck is an estimate based on what you put on your W-4 form. At the end of the year, when you file your taxes, you settle up — if too much was withheld, you get a refund; if too little, you owe the difference.
State income tax
Most states also collect income tax, withheld from your paycheck at the state level. Rates and rules vary widely. Some states — including Texas, Florida, Washington, and a handful of others — have no state income tax at all. Others have a flat rate; others use brackets similar to the federal system.
Check your state’s rate and whether your job location or home location determines which state’s tax applies (relevant if you live in one state and work in another).
Social Security tax
Social Security tax is 6.2% of your wages, up to an annual wage cap that adjusts each year (it was $168,600 in 2024). If you earn more than the cap, no Social Security tax is withheld on earnings above it.
Your employer pays a matching 6.2% on top of what comes out of your paycheck. Together, that’s 12.4% going into the Social Security system. This is part of what funds Social Security retirement and disability benefits.
Medicare tax
Medicare tax is 1.45% of all wages — with no cap, unlike Social Security. Your employer also matches the 1.45%. Together these two taxes (Social Security + Medicare) are called FICA, and combined they’re 7.65% out of your paycheck, with another 7.65% from your employer.
Higher earners (above $200,000 for single filers) pay an additional 0.9% Medicare surtax, withheld automatically once wages pass that threshold.
See What Is FICA on Your Paycheck? for a full explanation.
Health insurance premium
If you’re enrolled in your employer’s health insurance, your share of the premium comes out of each paycheck. This is usually pre-tax, meaning it reduces your taxable wages before income tax is calculated — a real benefit.
How much comes out depends on the plan you chose and whether you’re covering just yourself or dependents too. It can range from a small amount to several hundred dollars per paycheck.
401(k) and retirement contributions
If you’re contributing to a 401(k) or similar retirement plan, that amount comes out of each paycheck before federal income tax is calculated (for traditional contributions). This reduces your taxable income — one of the best tax benefits available to working people.
Roth 401(k) contributions are post-tax — they don’t reduce your taxable income now, but the money grows and withdraws tax-free in retirement.
Other deductions
Depending on your elections during benefits enrollment, additional amounts may come out:
- Dental and vision insurance premiums
- Flexible spending account (FSA) contributions — pre-tax money for medical expenses
- Dependent care FSA — pre-tax money for childcare
- Life and disability insurance premiums
- Commuter benefits — pre-tax transit or parking costs
- Union dues or other voluntary deductions
Pre-tax vs. post-tax deductions
This distinction matters for your budget and your taxes:
- Pre-tax deductions (health insurance, traditional 401(k), FSA) reduce your taxable wages before income tax is calculated. You pay less income tax as a result.
- Post-tax deductions (Roth 401(k), some life insurance) come out after taxes are calculated. You get no income tax reduction now.
Your pay stub will usually separate pre-tax and post-tax deductions so you can see exactly what’s happening.
How to read your pay stub
Your pay stub shows all of this in detail — gross pay, each tax withheld, each benefit deduction, and your net pay. Reading it once carefully the first time helps you understand exactly where your money goes.
See How to Read a Pay Stub for a line-by-line guide.
What is your effective tax rate?
Your effective tax rate is what you actually pay in income taxes as a percentage of your total income — not your marginal (top bracket) rate. Because the U.S. tax system is progressive, most people pay a lower effective rate than their bracket suggests. If your gross pay is $50,000 and your total federal income tax for the year is $5,500, your effective federal tax rate is 11%.
What if not enough is being withheld?
If your withholding is too low, you’ll owe money at tax time and possibly a small underpayment penalty. You can increase your withholding at any time by submitting a new W-4 to your employer. This is worth checking if you had a big raise, took on a second job, or had a major life change.
Further Reading
- Gross Pay vs. Net Pay
- How to Read a Pay Stub
- What Is FICA on Your Paycheck?
- How to Read Your W-2
- Taxes
- First Job Money Checklist
- Money Basics
This article is for general educational purposes only and does not constitute tax advice. Tax rates, brackets, and rules change annually. Consult the IRS website or a tax professional for current figures.