Understanding Your Paycheck: From Gross Pay To Deductions

Ever looked at your pay stub and raised an eyebrow at all of the deductions taken out each pay period?

Whether you’ve just received your first paycheck or are curious what all the numbers really mean, it’s never a bad idea to understand what’s being taken out of your pay and where that money goes. In most cases, employee paycheck deductions go toward state and federal income tax, Social Security, Medicare, and other programs.

Gross pay

Understanding Your Paycheck: From Gross Pay To Deductions - Gross pay

Your gross pay represents the total amount that you’ve earned for the pay period before any taxes or other deductions are taken out. This is also sometimes referred to as your gross income.

If you’re a salaried employee, your gross pay will be about the same every pay period. If you’re an hourly employee, your hourly pay will depend on how many hours you worked during the pay period. The gross pay section of your pay stub will typically include your gross pay for the pay period, as well as your gross pay for the year to date.

Other pay

Depending on the circumstances, you may receive additional pay besides the payment for the hours you’ve worked. This can include overtime pay, vacation pay, or sick pay.

Overtime typically accrues at 1.5 times your normal rate if you’re an hourly employee. These figures may be included separately on your pay stub, or as part of your gross pay. Your pay stub may also indicate how many hours you’ve accrued for vacation and sick pay that you have yet to use.

Income tax

One of the most significant deductions on your paycheck comes from income tax. Depending on what state you live in, you’ll likely have to pay both state and federal income tax. Income tax is generally calculated using an estimate based on your yearly earnings and other information provided on your W2 form.

If you pay extra in income tax, you’ll receive the money back in your tax return. If you pay too little, you’ll owe the IRS money come tax time.

State income tax

States use state income tax to fund things like education, transportation, healthcare, and other programs. Not all states charge income tax. As of 2020, the following states don’t charge any state income tax:

  • Alaska.
  • Florida.
  • Nevada.
  • New Hampshire.
  • South Dakota.
  • Tennessee.
  • Texas.
  • Washington.
  • Wyoming.

Federal income tax

Federal income tax represents the taxes that are taken out of your paycheck that go to the federal government. Federal income tax is used for national programs like defense spending, social safety net programs, and infrastructure.

Federal income tax is only charged on your taxable income, which represents your income after deductions for retirement savings, healthcare, and other similar programs.

FICA taxes

Understanding Your Paycheck: From Gross Pay To Deductions - FICA taxes

You’ll also see deductions on your pay stub for government programs including Social Security and Medicare. FICA stands for the Federal Insurance Contributions Act. It may also be referred to as OASDI (Old Age, Survivors, and Disability Insurance).

Social Security

The current rate for employee contributions to Social Security is 6.2%. Employers pay an additional 6.2% (and if you’re self-employed, you pay both portions). Social Security helps older Americans supplement their incomes in retirement or when they can no longer work.

Each generation pays into Social Security while they are working, and are then eligible to receive funds from Social Security upon retirement, which are based on a percentage of their pre-retirement income.


Employees pay 1.45% of their income to Medicare, while employers pay an additional 1.45%. Medicare provides healthcare coverage for citizens over 65, as well as some disabled Americans who can no longer work.

Other deductions

Depending on your employer and where you live, you may get other deductions taken out of your paycheck. These can include worker’s compensation assessment deductions and related work expenses that are automatically deducted from your paycheck.

Pre-tax contributions and benefits

If you participate in any benefit programs through your employer that involve pre-tax contributions, these will also be listed on your pay-stub. Contributions that are made to programs like retirement savings and healthcare are generally pre-tax, which means that you won’t pay any income tax on them. This means that it can be in your best interest to contribute as much as possible to these programs in order to lower your tax burden.


You may have a variety of insurance contributions deducted from your paycheck depending on what benefits your employer offers. Depending on where you work, your employer may cover some or all of your health insurance premium. Employer-sponsored health insurance contributions will likely make up the bulk of these deductions, but you may also make contributions for dental insurance, vision insurance, life insurance, and disability insurance.

Retirement savings

Contributions to retirement savings plans like a 401(k) are also listed on your pay stub. Like insurance contributions, contributions to retirement savings accounts are often pre-tax. Some employers may match contributions to a 401(k) up to a certain amount, making it especially advantageous to contribute to these accounts.

You can choose how much you want to contribute to your retirement account, but it’s definitely worth taking advantage of if it works with your budget, particularly if contributions come with an employer match.

Flexible spending accounts

A flexible spending account (FSA) allows employees to save for medical expenses. These contributions are pre-tax and can be used for things like healthcare deductibles, copayments, and prescriptions. Some employers may also make contributions to your FSA.

Health savings accounts

As with flexible spending accounts, you can contribute to a health savings account in order to save up money for medical expenses. In most cases, you can only contribute to a health savings account if you are enrolled in an HDHP (High Deductible Health Plan). For 2020, qualifying HDHPs include any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.

Net pay

Understanding Your Paycheck: From Gross Pay To Deductions - Net pay

Net pay represents your take-home pay for each pay period – it’s the money that’s actually deposited into your bank account. After all of the taxes and deductions are subtracted from your gross pay, net pay is what’s leftover. Pay stubs may include your net pay for this pay period, as well as your net pay for the year to date.

Why it’s important to understand your pay stub

Especially if you’re already signed up for direct deposit, you may not spend a lot of time glancing over your pay stub. However, it’s worth spending a few minutes looking it over, since even minor errors can mean that you’re taking home less money than you should.

Some things to check when you’re reviewing your pay stub include:

  • How many hours you’ve worked. If you’re an hourly employee, you should be sure that your hours are being accurately recorded on your pay stub. This includes how many hours you’ve worked during the pay period, as well as any overtime you may be eligible for.
  • What taxes are being taken out. It’s important to keep an eye on the taxes taken out of your paycheck. If too much money is being deducted per month, you may need to adjust your withholding. Alternatively, if you’re not paying enough income tax, you may end up owing the IRS money come tax time. If you have a side hustle or are self-employed on the side, you may want to get additional taxes taken out of your W-2 work in order to compensate.
  • Your personal info. You should always make sure that your personal information is correct on your pay stub.
  • Any other errors or confusing deductions. If you think there might be an error on your pay stub or don’t understand any information on it, you can always reach out to your employer and ask them to clarify. Small mistakes can happen, and it’s better to clear up any potential errors as soon as possible.

How to access your pay stub if you don’t get a paper check

Understanding Your Paycheck: From Gross Pay To Deductions - How to access your pay stub if you don't get a paper check

Since many employees are paid by direct deposit, they may not receive a physical paycheck each month. However, even if you don’t get paid by check, you should still be able to access your pay stub.

Depending on your employer, you may receive your pay stub in person, by mail, or electronically.

By mail

Although it’s becoming less and less common, some employers still mail physical pay stubs to their employees. If this is the case with your employer, you should receive your pay stub in the mail. If you’re not receiving pay stubs each pay period, you should contact your payroll administrator to make sure that they have the right address on file.


Employers who still give out physical pay stubs to their employees often distribute them in person, whether this means printing out a pay stub and handing it to you or leaving it in your office mailbox or on your desk.


Electronic pay stubs are a popular option for both employers and employees since they eliminate the hassle of a paper pay stub and allow you to access your pay stub at any time. If you receive your pay stub electronically, it may be emailed to you, or you may have to log in to your employee account to access it.

Making sure you can access your pay stub

Many state laws require employers to provide employees with their pay stubs each pay period. Even if your state doesn’t require it, it’s still a good idea to ask for a copy. Reviewing and understanding your pay stub can help you to catch any mistakes and make sure that you’re receiving the right amount.

If you currently receive your pay via a physical check and would prefer to receive payment through direct deposit, you should check with your employer about your options. You can quickly and easily set up a checking account for the purpose of receiving your pay.  Chime® is a great option that allows you to get paid up to two days early with direct deposit3, along with other features like overdraft protection5 and no hidden fees2. CIT is another good choice, with perks like no ATM fees and a mobile app.

2 There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.
3 Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.
5 Chime SpotMe is an optional, no fee service that requires a single deposit of $200 or more in qualifying direct deposits to the Chime Checking Account each month. All qualifying members will be allowed to overdraw their account up to $20 on debit card purchases and cash withdrawals initially, but may be later eligible for a higher limit of up to $200 or more based on member’s Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. Your limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your limit. Your limit may change at any time, at Chime’s discretion. Although there are no overdraft fees, there may be out-of-network or third party fees associated with ATM transactions. SpotMe won’t cover non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. See Terms and Conditions.


It’s important to understand the numbers on your pay stub in order to ensure that you’re getting paid the right amount. It can also be helpful to know where your tax deductions are going to and why.

Making sure that your pay stub is accurate is also important for tax purposes, since underpaying your taxes can mean that you’ll owe money come tax time. While all the numbers on your pay stub might seem confusing at first, they’re pretty simple to understand once you know what you’re looking at.

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