Congratulations! You just received your first paycheck from your full-time job. But wait—weren’t you expecting $2,000, and instead, it’s only $1,250? Where did the rest of your money go?
Let’s break it down so you understand what’s happening, why your take-home pay is lower than your salary, and how to make the most of your paycheck.
Gross Pay vs. Net Pay
Your salary or hourly wage before any deductions is called gross pay. The amount that actually lands in your bank account is net pay, or “take-home pay.” The difference? Taxes and other deductions.
Let’s look at an example:
Where Did the Money Go? Common Payroll Deductions
- FICA Taxes (Social Security & Medicare)
The government requires employers to withhold:
- 6.2% for Social Security (on income up to $168,600 in 2024)
- 1.45% for Medicare (with no income limit)
- Your employer also contributes 7.65% on top of this
These programs provide retirement income and healthcare benefits when you’re older. You don’t get a choice—you must contribute.
- Federal & State Income Taxes
When you start a job, you fill out a W-4 form that determines how much tax is withheld from your paycheck. If your state has an income tax, that gets deducted too. At tax time, if too much was withheld, you get a refund; if too little, you owe more.
- 401(k) Contributions (A Smart Move!)
You may work for a company that offers a 401(k) retirement plan, with an employer match. Whatever you elect to withhold is saved for your future! Since 401(k) contributions are pre-tax, your taxable income will be lower plus you are saving.
- Health Insurance & HSA Contributions
Your employer may offer subsidized health insurance, which requires a payment each pay period for coverage. If you select a high-deductible plan, you can also contributes to a Health Savings Account (HSA), where you can save money tax-free for future medical expenses. And, your employer may sweetens the deal by contributing company dollars annually.
To Illustrate- Meet Sally
Sally is 24 years old and gets paid every two weeks (26 paychecks per year). Her gross pay is $2,000 per paycheck, but she wisely chooses to:
- Contribute 8% to her 401(k) retirement savings (which her employer matches at 50%)
- Pay for health insurance
- Put money into a Health Savings Account (HSA) for future medical expenses
With these choices, her paycheck gets smaller—but she’s making smart financial moves that will benefit her long term. These are discretionary items, to a certain extent (although health insurance is a must)- they are often called “elections”. Taxes are also withheld.
So, here’s what Sally’s paycheck might look like:
| Description | $$ |
| Gross Pay | $2,000 |
| 401(k) Contribution (8%) | ($160) |
| Health Insurance | ($200) |
| HSA Contribution | ($50) |
| Social Security (6.2%) | ($124) |
| Medicare (1.45%) | ($29) |
| Federal & State Taxes | ($187) |
| Net Pay (Take-Home Pay) | $1,250 |
Key Takeaways
- Gross pay isn’t the same as take-home pay. Taxes and deductions lower what you actually receive.
- FICA taxes (Social Security & Medicare) are mandatory. Your employer also contributes on your behalf.
- Federal & state income tax withholdings depend on your W-4 form. You can adjust this to avoid over- or underpaying.
- Retirement savings (401(k)) and health benefits reduce your paycheck but offer long-term financial perks.
Pre-tax deductions lower your taxable income, helping you save on taxes today.
Got Questions?
Drop them in the comments! Understanding your paycheck is the first step to becoming the boss of your money. If you want to dive deeper into 401(k) matching, HSAs, or tax withholding, let me know!
For the W-4 Form and Instructions- use this link: https://www.irs.gov/pub/irs-pdf/fw4.pdf
Coming soon- What is a 401 (k).
— 1Practical Gal 