Reading a paycheck.
Gross pay is what you earned; net pay is what hits your bank account. Everything between them is a deduction. The first lesson of financial literacy is learning to read the gap.
You start a new job at $20 an hour, you work a 40-hour week, and you mentally bank $800. Then payday arrives and the direct deposit hits your account for $602.80. Where did the other $197.20 go? Nobody stole it. It is sitting in the various withholding columns of your pay stub, distributed across federal income tax, FICA (Social Security + Medicare), and state income tax in your state.
This is the single most universal piece of financial-literacy math in adult life: the gap between what an employer reports paying you and what you actually receive. The mathematics is simple subtraction, but learning to read your own pay stub line-by-line is the foundation of every other financial decision in the course — you cannot budget income you cannot read.
This lesson and the next two lay out the vocabulary and the arithmetic. By Lesson 3 you will be able to walk through a full year of paychecks, sum the withholdings, compare them against the actual tax owed, and predict whether you'll get a refund in April or owe additional money.
Gross minus deductions equals net.
A useful summary number is the take-home percentage: net divided by gross. A take-home of 75% means that for every dollar your employer reports paying you, 75 cents reaches your account. Typical take-home percentages for entry-level workers run between 75% and 85%, with higher earners losing a larger share to federal withholding as they move into higher brackets (the math behind that progression is the subject of Lesson 2).
A $1,000 gross paycheck visualized as a stack. Three deductions (federal 12%, FICA 7.65%, state 5%) are subtracted in sequence, leaving $753.50 net — a 75.35% take-home percentage.
Gross pay is the total earnings before any deductions. Net pay (also called take-home pay) is the amount remaining after all deductions are subtracted: net = gross − deductions. The take-home percentage is net / gross, expressed as a percent.
Words you'll see on every pay stub
- Gross pay The top-line number. The hourly rate times the hours worked, plus any overtime, tips, or bonuses, before anything is withheld. This is the number stated in a job offer (e.g., "$50,000 a year" = about $961.50 per weekly pay period).
- FICA Federal Insurance Contributions Act tax. Two components: Social Security at 6.2% of gross (up to an annual cap) and Medicare at 1.45% of gross (no cap). Combined rate for employees: 7.65%. Employers pay a matching 7.65%, doubling the total amount going to those programs.
- Federal income tax withholding An estimate of the federal income tax you will owe for the year, deducted from each paycheck so you don't owe a giant lump sum in April. The estimate is based on Form W-4 (filing status, allowances, extra withholding) and the IRS withholding tables. Lesson 3 reconciles this estimate with the actual tax owed.
- State income tax Same idea as federal withholding, but going to the state. Most states have an income tax; a handful (Texas, Florida, Nevada, Washington, others) do not. Rates and brackets vary by state.
- Net pay (take-home) Gross pay minus all deductions. The amount that actually shows up in your bank account on payday.
Reading a 40-hour weekly paycheck.
"You earn $20/hour and worked 40 hours this week. Your federal withholding rate is 12%, state withholding is 5%, and FICA is the standard 7.65%. Compute your gross pay, each of the three deductions, your net pay, and your take-home percentage."
Compute gross pay.
Multiply the hourly rate by the hours worked:
Compute each deduction as a percent of gross.
All three deductions are percentages of gross pay:
FICA: 0.0765 × 800 = $61.20
state: 0.05 × 800 = $40.00
Total deductions: $96 + $61.20 + $40 = $197.20.
→ three slices off the topSubtract total deductions from gross.
Compute the take-home percentage.
Divide net by gross and convert to a percent:
About three-quarters of every gross dollar reaches your account; the other quarter is split among the three taxing authorities.
→ a useful single summaryThree paychecks. Compute net and take-home.
You earn $15/hour and worked 30 hours last week. Federal withholding is 10%, FICA is 7.65%, state is 4%. What is your net pay? (Round to the nearest cent.)
Your annual salary is $65,000 and you are paid biweekly (26 pay periods per year). Federal withholding is 15%, FICA is 7.65%, state is 5%. What is your gross pay per period? (Round to the nearest cent.)
A worker with $48,000 annual salary takes home $36,720 per year after all deductions. What is the take-home percentage?
Three fast questions before you move on.
Q1. What is the standard FICA rate withheld from an employee's paycheck?
Q2. Your gross pay is $2,000, and your three deductions total $480. What is your net pay?
Q3. Which item below is NOT a standard deduction from a paycheck?
The number you actually budget against.
Every other financial decision in this course — budgeting (Topic 2 / 4), saving (Topic 3), borrowing (Topic 4), investing (Lessons 4-6 of this topic) — depends on the dollar amount that actually arrives in your account, not the salary figure your job offer quoted. Knowing your take-home percentage transforms a salary number into a realistic per-month available-cash figure, which is the input every other piece of personal-finance math takes as its starting point.
The withholdings on your paycheck are estimates of what you'll owe in taxes for the year. Whether those estimates are right is settled on April 15. Lesson 3 walks through that reconciliation; Lesson 2 first explains how the underlying federal tax is actually computed.
Next: Lesson 2 introduces tax brackets and marginal rate — the progressive system that determines how much federal income tax you owe at any given income, and why the popular "I don't want a raise, it will bump me into a higher bracket" anxiety is mathematically misguided.
Continue to Lesson 02Different angle? Need another rep? These are optional — tap any that look helpful.