How Your US Paycheck Works: Gross Pay vs Net Pay Explained

The Paycheck Anatomy

You get hired at $70,000 per year. You do the math: $70,000 ÷ 24 pay periods = $2,916.67 per paycheck. Then your first paycheck arrives and it's $2,187. Where did the other $729 go?

The answer is deductions — mandatory and voluntary withholdings that come out of every paycheck before you see a dime. Understanding these deductions is the difference between being confused by your paycheck and being in control of your finances.

Mandatory Deductions (You Can't Opt Out)

Deduction	Rate	Who Gets the Money
Federal Income Tax	Based on W-4 elections	IRS
Social Security (FICA)	6.2% of gross pay	Social Security Administration
Medicare	1.45% of gross pay	Medicare Trust Fund
State Income Tax	Varies by state (0% to 13.3%)	State government
Local/City Tax	Varies (some cities)	Local government

Social Security and Medicare together make up FICA (Federal Insurance Contributions Act). The combined rate is 7.65% — and your employer matches it, so the total FICA contribution is 15.3% of your pay.

Worked Example: $70,000 Salary in Texas

Texas has no state income tax. Here's the breakdown for a single filer with standard W-4 elections:

Deduction	Per Paycheck (Biweekly)	Annual Total
Gross Pay	$2,692.31	$70,000
Federal Income Tax	~$340	~$8,840
Social Security (6.2%)	$166.92	$4,340
Medicare (1.45%)	$39.04	$1,015
Total Deductions	~$545.96	~$14,195
Net Pay (Take-Home)	~$2,146.35	~$55,805

Your take-home pay is about 79.7% of your gross pay. The effective tax rate (federal + FICA) is about 20.3%.

Voluntary Deductions (You Choose These)

Health insurance: Employer-sponsored health plans typically cost $200-600/month for individual coverage
401(k) contributions: Pre-tax retirement savings (2026 limit: $23,500/year for under 50)
HSA/FSA: Health Savings or Flexible Spending Accounts for medical expenses
Dental and vision insurance: Usually $20-50/month
Life insurance: Employer-provided or supplemental
Union dues: If applicable

If you contribute $500/month to your 401(k) and $200/month to health insurance, your net pay drops further:

Net pay after voluntary deductions: ~$1,446.35 per paycheck

The W-4 Effect

Your federal withholding depends on how you filled out your W-4 form. The W-4 tells your employer how much to withhold based on your filing status, dependents, and other income.

Common W-4 mistakes:

Too many allowances claimed: You'll get a smaller paycheck but a bigger tax refund. This is essentially giving the government an interest-free loan.
Too few allowances claimed: You'll get bigger paychecks but may owe taxes at filing time.
Not updating after life changes: Marriage, divorce, having children, or a spouse starting work should trigger a W-4 update.

The goal is to have your withholding match your actual tax liability as closely as possible. Our Paycheck Calculator models different W-4 scenarios to help you find the right balance.

Why Your Take-Home Pay Matters for Budgeting

Most financial advice says "save 20% of your income." But which income? If you're planning based on gross pay ($70,000) and your take-home is $55,805, that 20% target should be $11,161 — not $14,000. Budgeting based on gross pay leads to frustration and overspending.

Build your budget around your actual net pay. Track it for 2-3 months to account for variations (overtime, bonus withholding, insurance changes).

State Tax Differences

State income tax varies dramatically. Here's how $70,000 in different states compares:

State	State Tax Rate	Annual State Tax	Take-Home (approx)
Texas	0%	$0	$55,805
California	~6%	~$3,200	$52,605
New York	~5.5%	~$3,000	$52,805
Florida	0%	$0	$55,805
Pennsylvania	3.07% flat	~$2,150	$53,655

The state tax difference alone can be $3,000+ per year. This is why some people choose to work remotely from no-income-tax states.

Frequently Asked Questions

Why is my first paycheck smaller than expected?

The first paycheck of the year may have higher withholding because the IRS uses annualized calculations. It typically normalizes by the second or third paycheck. If it's consistently smaller, check your W-4 elections.

Do I have to pay FICA on bonuses?

Yes. Bonuses are subject to the same FICA taxes as regular pay. They may be withheld at a flat 22% for federal income tax (supplemental rate), but FICA applies at the normal 7.65% rate.

What's the difference between exempt and non-exempt employees?

Exempt employees (typically salaried, earning above $684/week) don't qualify for overtime pay. Non-exempt employees (typically hourly) must be paid 1.5x for hours over 40 per week. The classification depends on your job duties and salary level, not just your title.

Can I claim exempt from federal withholding?

You can only claim exempt if you had no federal tax liability last year and expect none this year. This is rare for anyone earning above $15,000. Falsely claiming exempt can result in penalties.