Paycheck Deductions Explained: FICA, Withholding, and Where Your Money Goes

Your paycheck is your gross pay minus four layers of deductions: federal income tax withholding, payroll taxes (Social Security and Medicare), state and local taxes where they apply, and benefit or other deductions. In the example below, a $2,500 biweekly gross check turns into $1,742.75 of take-home pay, or 69.7% of gross, and every figure is labelled as either a published rate or an illustrative assumption.

The four layers on a pay stub

• Federal income tax withholding. Your employer withholds it according to your Form W-4 and the IRS withholding tables in Publication 15-T. It is a prepayment toward your annual tax bill, not the bill itself.
• Social Security and Medicare (FICA). The IRS states the employee rates as 6.2% for Social Security and 1.45% for Medicare, with the employer paying a matching share on top. Social Security applies only up to an annual wage base that the IRS updates each year, and Medicare has no wage base. Employers also withhold an extra 0.9% Additional Medicare Tax on wages above $200,000 in a calendar year. Check the IRS site for the current wage base before relying on any figure you read elsewhere.
• State and local income taxes. These vary by state and sometimes by city. Some states have no wage income tax, so the line may be zero or absent.
• Benefits and other deductions. Health premiums, retirement contributions, union dues, and similar items. Some are taken before income tax is calculated, some after, and which taxes they reduce depends on the type of benefit. Your pay stub and plan documents say how each one is treated.

Pay frequency changes the size of each check, not the year

The same $65,000 annual salary is paid out in different-sized pieces depending on how often you are paid. This matters for budgeting. A biweekly schedule has 26 checks against 24 for semimonthly, so in a typical year two months contain three biweekly paychecks.

Worked example: one biweekly paycheck

Assumptions: a $65,000 salary paid biweekly, a $150 pre-tax benefit premium per check that reduces income-tax wages but not FICA wages (some benefits differ, so check your own stub), a flat 12% illustrative federal withholding rate and a flat 4% illustrative state rate, and a $40 post-tax deduction. The flat rates are not real brackets or withholding tables. They are placeholders to show how the layers stack. The 6.2% and 1.45% payroll rates are the IRS figures above.

Total deductions are $757.25 of the $2,500.00. Notice that income tax is calculated on $2,350.00, not on the full gross, while Social Security and Medicare are calculated on the full $2,500.00. Because the two bases differ, a pre-tax benefit does not reduce every line equally. The calculator on this site applies its pre-tax input to both bases, so for a benefit that does not reduce FICA wages, its result will be a little different.

What a pre-tax contribution really costs in take-home pay

If you move $100 from your take-home pay into a pre-tax account that reduces only income-tax wages, your take-home pay falls by less than $100, because the withholding on that $100 stops. The table uses illustrative marginal rates, not brackets that apply to any particular person, and assumes FICA is unchanged.

Withholding is an estimate, not your tax bill

Your actual tax is calculated when you file. If your W-4 leads to $30 too much being withheld on each of 26 checks, you have lent the government $780.00 interest-free by the end of the year and will receive it back as a refund. If too little is withheld, you can owe at filing and, in some cases, a penalty. Update your W-4 after a marriage, a new job, a second job in the household, or a change in dependents.

Common mistakes

• Budgeting from gross pay. Plan from the net figure on a real stub.
• Assuming the same deductions all year. Social Security withholding stops once your wages pass the annual wage base, so high earners see their take-home rise late in the year.
• Treating a large refund as a bonus. It is your own money returned after being withheld too early.
• Ignoring a second job. Each employer withholds as if its paycheck were your only income, which can lead to under-withholding overall.
• Forgetting that three-paycheck months exist on biweekly schedules, and spending them as if they were regular income.

When this example does not apply

Real withholding uses the IRS tables and the details from your W-4. It is not a flat percentage, and state and local rules differ widely. Bonuses and other supplemental pay can be withheld differently from regular wages. Self-employed people and contractors pay payroll taxes on their own instead of through an employer. Always compare against a real pay stub, and use a tax professional for questions about your own situation.