Understanding Your Paycheck: Where Does the Money Go?
It’s a common shock for first-time employees: you accepted a job for $60,000 a year, but your monthly checks don't add up to $5,000. Where did the rest go? The difference between your salary and your paycheck is the difference between Gross Pay and Net Pay.
Using a paycheck calculator is the best way to budget accurately. It helps you see past the headline salary number to understand your real buying power.
The "Big Three" Taxes Explained
Almost every US worker sees three main deductions on their pay stub. Here is exactly what they are:
1. Federal Income Tax
This is the largest deduction for most people. The US uses a progressive tax system. This means you don't pay one flat rate on all your income. Instead, your income is chopped into chunks (brackets), and each chunk is taxed at a different rate.
- The first $11,600 is taxed at 10%.
- Income between $11,601 and $47,150 is taxed at 12%.
- Income between $47,151 and $100,525 is taxed at 22%.
2. State Income Tax
Where you live matters. States like California and New York have high income taxes (up to 13%), while states like Texas, Florida, and Washington have 0% state income tax. Our calculator adjusts your take-home pay based on the state you select.
3. FICA (Social Security & Medicare)
These are federal payroll taxes that fund social safety nets.
- Social Security (6.2%): You pay this on the first $168,600 of earnings (2024 cap). It funds retirement and disability benefits.
- Medicare (1.45%): You pay this on all earnings to fund healthcare for seniors. High earners (over $200k) pay an extra 0.9%.
Hourly vs. Salary: How Calculation Differs
Salaried Employees: Your annual gross pay is simply divided by the number of pay periods.
- Bi-weekly (most common): 26 paychecks per year.
- Semi-monthly: 24 paychecks per year.
- Weekly: 52 paychecks per year.
Hourly Employees: Your gross pay fluctuates based on hours worked.
Formula: Hourly Rate × Hours Worked = Gross Pay.
If you work overtime (over 40 hours/week), you typically earn 1.5x your normal rate ("time and a half").
Common Paycheck Mistakes to Avoid
- Ignoring Pre-Tax Deductions: Contributions to a 401(k), HSA, or FSA happen before taxes. This actually lowers your taxable income and reduces your tax bill.
- Under-Withholding: If you claim too many allowances on your W-4, you get bigger paychecks now but might owe a huge tax bill in April.
- Forgetting Health Insurance: Medical, dental, and vision premiums are often deducted directly from your paycheck, further reducing your net pay.
Plan Your Budget with Confidence
Don't guess your income. Use the Paycheck Calculator above to see exactly what you can afford for rent, savings, and lifestyle. Knowing your true net pay is the foundation of personal finance.