Every Paycheck Deduction Explained: Where Your Money Actually Goes

Reading Your Pay Stub

Your pay stub is a financial document most people glance at without understanding. Between gross pay and net pay lies a series of mandatory and voluntary deductions that can consume 25-40% of your earnings. Understanding each one helps you verify you’re being paid correctly, optimize your benefits elections, and plan your finances accurately.

Mandatory Deductions: Taxes

These deductions are required by law. You cannot opt out.

Federal Income Tax Withholding

What it is: An estimated prepayment of your annual federal income tax, withheld from each paycheck based on your W-4 elections.

How much: Varies based on your income, filing status, and W-4 allowances. A single filer earning $75,000/year with a standard W-4 will see roughly $700-$800 per monthly paycheck withheld for federal tax.

Key point: Withholding is an estimate, not your actual tax. When you file your tax return, you reconcile what was withheld against what you actually owe. Overpayment = refund. Underpayment = balance due.

You can adjust this: Submit a new W-4 to your employer anytime. If you consistently get large refunds (over $1,000), you’re having too much withheld - that’s money that could be in your paycheck.

What it is: Funds the Social Security program - retirement benefits, disability insurance, and survivor benefits.

Rate: 6.2% of gross wages, up to the Social Security wage base ($168,600 in 2024). Your employer pays a matching 6.2%.

On a $75,000 salary: $4,650/year, or about $387.50/month.

Wage base cap: Once you’ve earned $168,600 in a calendar year, Social Security tax stops being deducted for the remainder of the year. If you earn $200,000, the last $31,400 is not subject to Social Security tax. You’ll notice larger paychecks in the final months of the year.

Medicare Tax

What it is: Funds the Medicare health insurance program for people 65 and older and certain disabled individuals.

Rate: 1.45% of all gross wages (no cap). Your employer pays a matching 1.45%.

Additional Medicare Tax: An extra 0.9% on wages exceeding $200,000 (single) or $250,000 (married filing jointly). This additional tax has no employer match.

On a $75,000 salary: $1,087.50/year, or about $90.63/month.

FICA Summary

Social Security (6.2%) + Medicare (1.45%) = 7.65% of your gross pay. On a $75,000 salary, that’s $5,737.50/year - the same amount your employer pays on your behalf, for a combined 15.3%.

State Income Tax

What it is: Your state’s income tax, withheld similarly to federal tax.

Range: 0% (nine states) to 13.3% (California’s top bracket). Most workers pay an effective state rate of 3-6%.

If you live in a no-income-tax state (AK, FL, NV, NH, SD, TN, TX, WA, WY), this line won’t appear on your stub.

Local/City Income Tax

What it is: Some cities and counties levy their own income tax.

Notable examples:

New York City: 3.078-3.876%
Many Ohio cities: 1-3%
Philadelphia: 3.75% (residents), 3.44% (non-residents who work in the city)
Detroit: 2.4%

Most workers in most cities don’t pay a local tax, but if you work in a city that has one, it’s an additional line item.

State Disability Insurance (SDI)

What it is: Mandatory in a few states - California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico. Provides short-term disability benefits if you can’t work due to non-work-related illness or injury.

Rate: Varies by state. California’s SDI rate is 1.1% on wages up to $153,164 (2024).

Pre-Tax Deductions: Reducing Your Taxable Income

These are voluntary deductions you elect, typically during open enrollment. They’re subtracted from your gross pay before taxes are calculated, which means they reduce your taxable income.

Health Insurance Premiums

What it is: Your share of the health insurance premium. Most employers pay 50-80% of the total premium; the remainder is your responsibility.

Typical cost: $100-$600/month depending on plan level (individual vs family) and employer subsidy.

Tax advantage: Premiums deducted through a Section 125 cafeteria plan are pre-tax - you avoid federal income tax, state income tax, and FICA tax on this amount. On $500/month, that’s roughly $150/month in tax savings at a 30% combined rate.

Dental and Vision Insurance

What it is: Separate insurance plans for dental and vision care.

Typical cost: Dental: $20-$60/month. Vision: $5-$25/month. These are usually pre-tax.

401(k) / 403(b) Contributions (Traditional)

What it is: Your retirement savings contribution to an employer-sponsored retirement plan.

2024 limit: $23,000 ($30,500 if you’re 50 or older).

Tax advantage: Traditional (pre-tax) contributions reduce your taxable income. Contributing $500/paycheck (biweekly) at a 22% federal bracket saves you $110 per paycheck in federal taxes alone.

Roth 401(k): If you contribute to a Roth option, the deduction appears on your stub but does not reduce your taxable income. You pay tax now but withdraw tax-free in retirement.

Health Savings Account (HSA)

What it is: A tax-advantaged account for medical expenses, available only if you have a high-deductible health plan (HDHP).

2024 limits: $4,150 (individual) / $8,300 (family).

Tax advantage: Triple tax benefit - pre-tax contributions, tax-free growth, tax-free withdrawals for qualified medical expenses. HSA contributions also avoid FICA tax when made through payroll deduction.

Flexible Spending Account (FSA)

What it is: A pre-tax account for healthcare expenses (Healthcare FSA, up to $3,200) or dependent care expenses (Dependent Care FSA, up to $5,000).

Key difference from HSA: FSA funds mostly expire at year-end (use-it-or-lose-it, with some exceptions for grace periods or $640 rollover). HSAs roll over indefinitely.

Commuter Benefits

What it is: Pre-tax deductions for transit passes and qualified parking.

2024 limits: $315/month for transit, $315/month for parking.

Tax advantage: Reduces both income tax and FICA tax.

Post-Tax Deductions

These are deducted after taxes are calculated. They don’t reduce your taxable income.

Roth 401(k) / Roth 403(b) Contributions

Roth retirement contributions are made with after-tax dollars. The paycheck deduction appears, but your taxes aren’t reduced. The benefit comes later - qualified withdrawals in retirement are completely tax-free.

Life Insurance (Over $50,000 Coverage)

Employer-paid group term life insurance up to $50,000 is a tax-free benefit. Any employer-paid coverage above $50,000 generates “imputed income” - a phantom income amount added to your taxable wages. If you elect additional voluntary life insurance, the premiums are typically post-tax.

Disability Insurance (Voluntary)

If you elect additional short-term or long-term disability coverage beyond what your employer provides, premiums are usually post-tax. The benefit: if you pay premiums with post-tax dollars, disability benefits are tax-free if you need them.

Wage Garnishments

What they are: Court-ordered deductions for child support, alimony, tax levies, student loan defaults, or creditor judgments.

Limits: Federal law limits garnishments to 25% of disposable earnings (after mandatory deductions) for consumer debts. Child support can take up to 50-65%.

These are involuntary - you can’t opt out, and your employer is legally required to comply with the garnishment order.

Union Dues

If you’re a member of a labor union, dues are typically deducted from each paycheck. The amount varies by union but is commonly 1-2.5% of gross pay.

Charitable Contributions

Some employers allow payroll deductions for charitable giving (e.g., United Way campaigns). These may or may not be pre-tax - check with your employer.

What Your Employer Pays (That You Never See)

Beyond your visible deductions, your employer pays additional costs per employee:

Employer FICA match: 7.65% of your gross wages
Federal unemployment tax (FUTA): 6% on first $7,000 of wages (effectively 0.6% after state credit)
State unemployment tax (SUTA): Varies by state and employer history (0.5-5%+)
Workers’ compensation insurance: Varies by industry (0.5-5%+ of payroll)
Employer health insurance contribution: Typically $5,000-$15,000/year per employee

The total employer cost of an employee is typically 1.25-1.4x the base salary.

How to Audit Your Pay Stub

Every few months, check these items:

Gross pay matches your salary or hourly rate x hours: Simple math catches input errors.
Federal withholding seems reasonable: Use the IRS Withholding Estimator to verify.
FICA deductions are correct: Social Security should be exactly 6.2% of gross (until you hit the wage base cap). Medicare should be exactly 1.45%.
Pre-tax deductions match your elections: Verify 401(k) contributions, HSA, and insurance premiums match what you chose during enrollment.
Year-to-date totals are tracking: Check that YTD figures are consistent with what you expect.

Payroll errors happen more often than you’d think. Catching them early saves you from larger corrections later.

The Big Picture

On a $75,000 salary, here’s a typical deduction breakdown:

Deduction	Annual Amount	Per Paycheck (Biweekly)
Federal income tax	$6,700	$258
Social Security	$4,650	$179
Medicare	$1,088	$42
State income tax (5%)	$2,800	$108
Health insurance	$3,600	$138
401(k) (6%)	$4,500	$173
Dental/vision	$420	$16
Total deductions	$23,758	$914
Net pay	$51,242	$1,971

That’s 31.7% of gross pay deducted - and this example includes only a modest 401(k) contribution. Understanding each line item gives you the knowledge to optimize what you can control and plan around what you can’t.