How to Read Your Paycheck: Taxes, Deductions and the W-4

Why your paycheck is smaller than your salary

Your salary or hourly rate describes gross pay, the amount you earn before anything is taken out. Net pay, or take-home pay, is what actually reaches your bank account after taxes and deductions. For many U.S. workers, net pay is 20% to 35% lower than gross pay, depending on income, state, benefits and retirement contributions.

Understanding each line on your pay stub matters for budgeting, because a budget should be built on net pay. It also helps you catch payroll errors, see the true cost of your benefits and decide whether your tax withholding is set correctly.

A sample pay stub, line by line

Here is a simplified biweekly pay stub for a hypothetical single employee earning $65,000 per year, contributing 5% to a traditional 401(k), paying $85 per paycheck for health insurance and living in a state with a flat 4% income tax. Real stubs vary by employer, state and the exact IRS withholding tables in use.

Notice that Social Security and Medicare were calculated on $2,415, not $2,500 or $2,290. That is because health premiums paid through a cafeteria plan are generally exempt from those payroll taxes, while traditional 401(k) contributions reduce income subject to federal income tax but not Social Security and Medicare. Small details like this explain why simple percentage estimates rarely match a real stub exactly.

Also look at the year-to-date column most stubs include. It shows running totals for the year and is the best place to check whether withholding is on track.

Pre-tax vs after-tax deductions

Deductions fall into two broad groups, and the difference affects your taxes.

Common pre-tax deductions

• Traditional 401(k), 403(b) or similar retirement contributions.
• Health, dental and vision premiums paid through a cafeteria plan.
• Health savings account (HSA) and flexible spending account (FSA) contributions made through payroll.
• Some commuter and transit benefits.

Common after-tax deductions

• Roth 401(k) contributions.
• Some life or disability insurance premiums.
• Union dues, charitable payroll giving and wage garnishments.

Pre-tax deductions lower your taxable income, which is why raising a traditional 401(k) contribution by $100 per paycheck usually reduces take-home pay by less than $100.

Payroll taxes: Social Security and Medicare

Together, Social Security and Medicare taxes are known as FICA. Employees pay 6.2% for Social Security and 1.45% for Medicare, for a combined 7.65%, and employers pay a matching amount. Social Security tax applies only up to an annual wage cap, which is $184,500 for 2026, so very high earners may notice their paychecks rise late in the year once they pass it. Medicare tax has no cap, and an additional 0.9% Medicare tax applies to wages above $200,000.

You cannot adjust FICA withholding with a W-4. It is a fixed percentage of covered wages.

Federal income tax withholding and Form W-4

Federal income tax withholding is your employer's estimate of the tax you will owe for the year, spread across your paychecks. The estimate is based on the Form W-4 you complete when you start a job. The current W-4 no longer uses allowances. Instead, it has five steps:

1. Step 1: Personal information and filing status, such as single, married filing jointly or head of household.
2. Step 2: Multiple jobs or a working spouse. If your household has more than one job, this step prevents under-withholding. You can use the IRS estimator, a worksheet or a checkbox.
3. Step 3: Dependents. Enter amounts for qualifying children and other dependents to reduce withholding for expected credits.
4. Step 4: Other adjustments. Add other income such as interest (4a), deductions beyond the standard deduction (4b) or an extra flat amount to withhold each paycheck (4c).
5. Step 5: Sign and date. Only Steps 1 and 5 are required. If you skip the others, withholding is calculated as if you have one job and take the standard deduction.

Refund or balance due: what your withholding is telling you

A tax refund is not a bonus. It means more was withheld during the year than you owed. A $3,120 refund on biweekly pay means about $120 per paycheck was over-withheld, money that could have gone to an emergency fund or debt payments during the year.

On the other hand, owing a large balance can be stressful, and significant underpayment may lead to a penalty. Many people aim for withholding that lands close to their actual tax, with a small refund as a cushion. The right target is partly personal: some people like a refund as forced savings, and that can be a reasonable choice as long as it is intentional.

The two-job trap

One of the most common withholding surprises happens when a household has two incomes. Each employer withholds as if its paycheck is your only income, so each job applies the lower tax brackets and the standard deduction separately. The combined withholding can fall well short of the actual tax owed.

For example, two spouses each earning $60,000 may each have withholding calculated as if the household earned $60,000. Completing Step 2 of the W-4 at both jobs, or using the IRS Tax Withholding Estimator and entering an extra amount in Step 4(c) at one job, solves the problem. The same issue applies to side income, which is covered in our guide to side hustle budgeting and taxes.

When to update your W-4

You can submit a new W-4 to your employer at any time. Review it after any of these changes:

• Starting a new or second job, or a spouse starting or stopping work.
• Marriage, divorce or the birth or adoption of a child.
• Starting significant side or freelance income.
• A large refund or balance due on your last tax return.
• A big raise, bonus or change in deductions.

The free IRS Tax Withholding Estimator on IRS.gov is the most reliable way to check. Have your most recent pay stub and last year's tax return handy, and the tool will suggest what to enter on a new W-4.

State and local taxes

Most states have an income tax, and many have their own withholding form similar to the W-4. A handful of states, including Texas, Florida, Nevada and Washington, do not tax wages. Some cities and counties also levy local income taxes. If you move or start working remotely from another state, check your stub to confirm the correct state is withholding.

A two-minute paycheck check

Make it a habit to glance at your stub every pay period, or at least once a month during your monthly financial review. Confirm that gross pay matches your hours or salary, benefit deductions match what you enrolled in, retirement contributions use the right percentage and year-to-date totals look reasonable. Payroll errors do happen, and they are much easier to fix when caught early.

Frequently asked questions

Why was my first paycheck at a new job smaller than expected?

First paychecks often cover a partial pay period, and some employers pay on a delay, so the first check may include fewer days. Benefit deductions may also start immediately. Compare the pay period dates on the stub with the days you worked.

Why did my take-home pay change in January?

New benefit premiums, updated retirement contribution elections and annual changes to IRS withholding tables often take effect at the start of the year. High earners who stopped paying Social Security tax late in the prior year also see that tax return in January because the wage cap resets.

Is it better to get a big tax refund or owe a little?

Financially, a smaller refund means you had more of your money during the year. Owing a small amount is usually fine, but owing a large amount could lead to an underpayment penalty. Many people aim for withholding that ends up close to their actual tax.

Can I claim exempt from federal withholding?

Only if you had no federal income tax liability last year and expect none this year. Claiming exempt when you do owe tax can result in a large bill and penalties, and an exempt W-4 generally must be renewed each year.

Does contributing more to my 401(k) lower my taxes?

Traditional 401(k) contributions lower the income subject to federal income tax, and in most states state income tax, so your take-home pay drops by less than the amount contributed. Roth 401(k) contributions do not lower current taxes, but qualified withdrawals in retirement are tax-free.