You get your paycheck, but there is a big difference between your gross and net earnings. Taxes and different types of payroll deductions account for this gap. If you are unsure what these deductions are and how they affect your take-home pay, here's some information to keep in mind.
Federal & State Income Taxes
Your employer withholds taxes from every paycheck. Federal and state taxes are used to fund public services like infrastructure and education. These taxes are taken out of your gross income and are based on how you fill out your W-4 form.
Your tax filing status, tax bracket, and taxable income all affect how much federal tax you pay. Taxable income is the amount of your income that is subject to tax after you take allowable deductions and exemptions. Most people pay federal income tax unless their income is low enough that deductions and credits reduce their tax bill to zero. If you live in a state with no state income tax, you will not see state payroll withholding.
Social Security
Your employer withholds 6.2% of your gross pay up to $184,500 for Social Security.1 You'll also see a line item on your paycheck for Social Security or Federal Insurance Contributions Act (FICA) taxes.
How Timing Affects Your Benefit
- You pay into Social Security throughout your working years.
- Beginning at age 62, you can start collecting benefits based on what you've contributed to Social Security taxes.
- If you collect benefits before your full retirement age, defined by the year in which you were born, your monthly benefit will be reduced.
Medicare Tax
This payroll deduction is part of FICA taxes on your paycheck. It helps fund the federal health care program for older adults. Federal law requires your employer to:
- Withhold 1.45% of your income for Medicare taxes, according to the IRS.2
- Contribute an additional 1.45% to the federal government.
Total = 2.9%.
If you earn more than $200,000 in a calendar year, you will pay an additional 0.9% Medicare tax. Like Social Security, you can begin receiving Medicare benefits at a certain age. You become eligible for Medicare when you turn 65.
Retirement Deductions
The items above are mandatory deductions, but you may also have voluntary deductions. Retirement contributions fall into this category.
If you participate in a 401(k) or 403(b) through your employer, a portion of your paycheck can be withheld and deposited into your account based on your selected contribution rate or an automatic enrollment feature.
How Contributions Are Taxed
| Account Type | How Taxes Work |
|---|---|
| Traditional 401(k) or 403(b) | Contributions are made with pretax income. Taxes are paid when you withdraw funds in retirement. |
| Roth 401(k) or 403(b) | Contributions are made after taxes. Withdrawals in retirement are generally tax-free if requirements are met. |
Key Points to Know
In either case, you likely determine the percentage of your income to contribute. Your employer is not responsible for withholding income for any individual retirement accounts (IRAs) you might hold. For 2026, you can contribute up to $24,500 to a 401(k) or 403(b) plan.3
Insurance Policy Deductions
If you have employer-sponsored health, dental, or vision insurance, you will pay your monthly premiums through a payroll deduction. Your employer usually deducts the required amount and sends the payment directly to your insurance company.
If you have voluntary benefits, such as life insurance, a flexible spending account, or a pretax health savings account for out-of-pocket health care costs, you will also contribute to these plans through payroll deductions.
Other Payroll Deductions & Withholdings
Depending on your situation, you may have additional deductions and payroll withholdings. These may include wage garnishments for child support, union dues, or payments for back taxes you owe.
Payroll Deductions & Your Take-Home Pay
Payroll deductions are more than just line items on your paycheck. Many help fund public services and federal programs, such as Social Security and Medicare. The next time you see items like FICA or federal and state income taxes on your pay stub, you may better understand where your money goes and why.
Sources
- 2026 Cost-of-Living Adjustment (COLA) Fact Sheet. https://www.ssa.gov/news/en/cola/factsheets/2026.html.
- Topic No. 756, Employment Taxes for Household Employees. https://www.irs.gov/taxtopics/tc756.
- Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.
