Have you ever looked at your paycheck and thought, "Wait... where did all my money go?" You are not alone. For many people, paychecks feel confusing and even frustrating. Once you understand what all those deductions and taxes mean, you'll feel more in control of your money. Here is a simple breakdown of your paycheck:

 

Gross pay vs. net pay

Let's start with two important terms:

• Gross pay= what you earn before anything is taken out
• Net pay= what you take home after deductions (your REAL paycheck)

Your budget should always be based on net pay, because that's what you actually have to work with.

 

What gets taken out of your paycheck?

Here are a few common types of deductions:

1. Federal income tax

This is what you pay the federal government based on your income. The amount depends on:

• How much you earn
• Your tax filing status
• The number of allowances/dependents you claimed on your W-4 form

Good to know: This tax helps pay for things like Social Security, defense, and infrastructure. You can adjust your W-4 at any time to update your withholdings.

 

2. State & local income tax

Not every state has an income tax, but if your does it will be listed as a separate deduction. Some cities and counties also collect income tax.

 

3. Social Security Tax (FICA)

This is 6.2% of your wages and goes toward the Social Security program that pays retirement and disability benefits. Your employer also pays 6.2% on your behalf.

 

4. Medicare Tax (FICA)

This is 1.45% of your wages and helps fund the Medicare program for seniors and people with disabilities. You employer also pays 1.45% on your behalf.

 

5. Health insurance premiums

If you get health, dental, or vision insurance through work, the amount you pay for your coverage usually deducted automatically. Look for the like items like: Medical, dental, and vision. These are often pre-tax deductions, which can lower your taxable income.

 

6. Retirement contributions (like a 401(k))

If you are contributing to a workplace retirement plan, it will show up as a deduction.

• Traditional 401(k)= pre-tax (lowers your taxable income now)
• Roth 401(k)= post-tax (no tax break now, but tax-free later)

 

7. Other deductions

You might also see:

• Thrift Savings Plan (TSP), if you are in the military
• Life insurance
• Disability insurance
• Union dues
• Wage garnishments
• Flexible Spending accounts (FSA) & Health Savings Accounts (HSA)

 

Why does my friend with the same job bring home more?

Even if you earn the same hourly wage or salary, your take-home pay could differ based on:

• The number of dependents you claim
• Whether you're contributing to a 401(k)
• Health insurance plans
• Local tax rates
• Other voluntary deductions

That's why it's important to review your pay stub, not just compare checks.

 

What you can do with this info

Once you understand your deductions, you can make more intentional choices:

• What to increase take-home pay? Review your W-4 or pause retirement contributions temporarily (if needed).
• Want to save more? Increase your 401(k) contribution gradually.
• Feeling lost? Ask HR for a breakdown of your pay stub or work with a financial counselor to review it together.

Understanding your paycheck isn't just about numbers, it's also about confidence. When you know where your money is going, you can start making empowered decisions about how to use it, save it, and plan for the future. 

At Walters Financial Wellness, I help clients take the mystery (and stress) out of money, starting with basics like your paycheck. Need help reviewing your pay stub or creating a budget based on your take-home pay? Let's talk. Make a consultation today.