How Paycheck Withholding Works: Where Your Money Goes
Open any pay stub and the first thing you notice is how far the number at the bottom is from the number at the top. Gross pay is the amount in your offer letter. Net pay is what arrives in your account. The gap is withholding: money your employer sends to the government (and to benefit providers) on your behalf before you ever see it. This guide walks through each line, in the order it is calculated, so you can predict your own paycheck and understand when it is worth changing.
Gross pay, taxable wages and net pay
Three different numbers show up on a pay stub, and mixing them up causes most paycheck confusion.
- Gross pay is your total earnings for the period: salary or hourly pay, overtime, bonuses and commissions.
- Taxable wages are gross pay minus pre-tax deductions. They are different for each tax. Federal income tax wages exclude 401(k) deferrals, HSA contributions and Section 125 health premiums. Social Security and Medicare wages exclude only the Section 125 items (and HSA contributions made through payroll), but not 401(k) deferrals.
- Net pay is what is left after taxes and after-tax deductions such as Roth 401(k) contributions, union dues or wage garnishments.
For example, a single worker in Texas earning $75,000 a year has gross pay of $2,884.62 per biweekly paycheck. Federal income tax is about $295.00, Social Security and Medicare are $220.67, and net pay is about $2,368.94.
Federal income tax withholding
The largest deduction for most workers is federal income tax. Your employer does not calculate it from scratch each pay period. Instead it follows IRS Publication 15-T using the information you provided on Form W-4: your filing status, whether you hold multiple jobs, dependent credits, other income and any extra withholding you requested.
The IRS methods annualize your pay (multiply the paycheck by the number of pay periods), subtract the standard deduction built into the tables, apply the progressive tax brackets and divide the result back by the number of pay periods. In 2026 the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, and the brackets run from 10% to 37%.
Progressive brackets are not cliffs
A common worry is that earning more could reduce take-home pay by pushing you into a higher bracket. It cannot. Each rate applies only to the slice of income inside its range. A single filer with $60,000 of taxable income pays 10% on the first $12,400, 12% on the next $38,000 and 22% on only the remainder. A raise always increases net pay, even if part of it is taxed at a higher rate.
| Rate | Taxable income |
|---|---|
| 10% | $0 to $12,400 |
| 12% | $12,400 to $50,400 |
| 22% | $50,400 to $105,700 |
| 24% | $105,700 to $201,775 |
| 32% | $201,775 to $256,225 |
| 35% | $256,225 to $640,600 |
| 37% | $640,600 and above |
FICA: Social Security and Medicare
FICA taxes fund Social Security and Medicare, and they are the only federal taxes that apply from the first dollar with no standard deduction.
- Social Security: 6.2% of wages, up to the annual wage base. For 2026 that base is $184,500, so the maximum employee tax is $11,439. Your employer pays a matching 6.2%.
- Medicare: 1.45% of all wages with no cap, matched by your employer.
- Additional Medicare Tax: an extra 0.9% on wages over $200,000. Employers must withhold it once your wages pass $200,000 regardless of filing status, and your return reconciles the actual threshold ($250,000 for married filing jointly).
Together, the standard employee FICA rate is 7.65% for most workers. Because the Social Security portion stops at the wage base, high earners see their take-home percentage rise in the fall when they pass the cap, which is why some people notice a bigger paycheck late in the year.
State and local income tax
Nine states do not tax wages. The rest use flat or graduated rates, and several add payroll programs such as California SDI or New York paid family leave. A few cities, including New York City and Philadelphia, also withhold local income tax. State withholding follows the state’s own form, which is often a state version of the W-4. The paycheck calculator for each state shows the specific structure, and the comparison tool shows how much the difference is worth in dollars.
Pre-tax deductions: the paycheck-shrinking tools that save tax
Pre-tax deductions are subtracted before income tax is calculated, so a $100 contribution costs you less than $100 of take-home pay. The common ones:
- Traditional 401(k) or 403(b): reduces federal and most state income tax but not FICA. The 2026 limit is $24,500.
- Health, dental and vision premiums through a Section 125 cafeteria plan reduce income tax and FICA.
- HSA contributions through payroll reduce income tax and FICA. 2026 limits are $4,400 self-only and $8,750 family.
- Flexible spending accounts also reduce income tax and FICA.
Our guide to pre-tax and post-tax deductions shows how each choice changes a real paycheck.
Why you can still get a refund or owe money
Withholding is an estimate made during the year; the final bill is calculated on Form 1040 after the year ends. Three situations cause the difference:
- Your life changed. A second job, a spouse who started working, a child, a home purchase or a side business all change the real tax but not the withholding unless you update your W-4.
- Credits and deductions. The withholding tables assume a standard deduction and no credits other than those you claimed. Itemizing, education credits or the child tax credit ($2,200 per qualifying child) can lower the actual tax.
- Uneven income. Bonuses, overtime or commissions are withheld as if they recur every pay period (see how bonuses are taxed).
A large refund is simply an interest-free loan to the government, while a large balance due means you under-withheld and may owe a penalty if you fall short of the safe harbor. The target for most households is to land within a few hundred dollars of zero.
How to estimate your own withholding
- Start with annual gross pay and subtract pre-tax deductions to find taxable wages.
- Subtract the standard deduction and apply the federal brackets for your filing status.
- Subtract credits such as the child tax credit.
- Add FICA: 6.2% of wages up to the wage base plus 1.45% of all wages.
- Add state income tax and payroll programs.
- Divide by the number of pay periods.
The paycheck calculator does exactly these steps. If you want to compare it to your real stub, use the stub-reading checklist in our pay stub guide.
A worked example: following $3,000 from gross to net
Suppose a single employee in Colorado earns $78,000 a year and is paid semimonthly, so each gross paycheck is $3,250. The employer first takes out any pre-tax benefits, say $150 for health insurance, which leaves $3,100 of income-tax wages. Social Security takes 6.2% of $3,100 and Medicare takes 1.45%, about $237 together. Federal income tax is then computed from the annualized wages and the W-4 entries. State tax follows the Colorado rules, and any after-tax items come out last. What remains is net pay. If you trace each line on your own stub this way, you will see that nothing is mysterious: each deduction is a rule applied to a specific base, and the bases differ.
The order of operations matters because of those bases. A 401(k) deferral shrinks the base for income tax but not for FICA, which is why a worker who contributes 10% to a traditional 401(k) sees net pay fall by less than 10% of gross, but still pays full Social Security and Medicare tax on the amount deferred. Section 125 premiums do the opposite, shrinking all of the bases at once. After-tax deductions such as Roth contributions or garnishments reduce only the final net figure.
Common withholding mistakes
- Never updating the W-4 after a major change. The form you filled out on your first day assumes your first-day situation.
- Claiming dependents on both spouses’ W-4s. Both employers will reduce withholding for the same child, which leads to a surprise bill.
- Ignoring a second job. Each employer withholds as if their job were your only income, so withholding on two jobs is usually too low unless you use the Step 2 checkbox or the IRS estimator.
- Treating a refund as a raise. A refund is your own money returned; adjusting withholding gives you that money earlier in smaller amounts.
- Forgetting state and local differences. If you live in one state and work in another, one or both states may withhold, and you may need to claim a credit on the return.
When to adjust your withholding
Check withholding after any major life event and at least once a year in the fall, when it is still possible to fix a shortfall with a few larger paychecks. The IRS Tax Withholding Estimator uses your year-to-date pay and projected income to recommend W-4 entries. Many people also use the extra withholding line (Step 4(c)) to add a fixed dollar amount per paycheck. If you run a side business, quarterly estimated payments are an alternative; see the quarterly estimated taxes guide.