How a Paycheck Works
Why the number on your offer letter is bigger than the money that lands in your account.
Gross pay versus net pay
Gross pay is the full amount you earn before anything is taken out. Net pay, often called take-home pay, is what is left after deductions, and it is the money that actually reaches your bank account.
Say a job pays 15 dollars an hour and you work 40 hours in a week. Your gross pay is 600 dollars. After taxes and other deductions, your net pay might be closer to 510 dollars. The gap is normal, and knowing it helps you plan around the real number.
Where the money goes
The amount removed from your gross pay is split among a few things. Some is tax, and some may be benefits you signed up for.
- Federal income tax: money sent to the national government, based on how much you earn.
- State income tax: a similar deduction in most states, though a few states have none.
- FICA: a required tax that funds Social Security and Medicare, explained below.
- Benefits: optional items like health insurance or retirement savings, if your job offers them.
What FICA means
FICA stands for the Federal Insurance Contributions Act. It is the tax that pays for Social Security, which supports people in retirement and those with disabilities, and Medicare, which helps cover health care for older adults.
You pay a set share of your wages toward FICA, and your employer pays a matching share. On your pay stub it often appears as two lines, one labeled Social Security and one labeled Medicare.
Reading your pay stub
A pay stub is the summary that comes with each paycheck. It lists your gross pay at the top, each deduction in the middle, and your net pay at the bottom. It also shows year-to-date totals, which add up everything earned and withheld so far this year.
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