Payroll Deductions: Reading Your First Paycheck
Understand the mandatory and voluntary deductions taken from your paycheck, why they exist, and how they affect your take-home pay.
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Your first paycheck will be smaller than you expect, here's where the money goes
The gap between what you earn and what hits your bank account is payroll deductions. Understanding each line on a pay stub turns a confusing document into useful financial information and helps you make smart decisions about voluntary benefits like retirement contributions and health insurance.
Gross vs. Net Pay
Gross pay is total earnings before deductions: hourly rate times hours worked, or salary allocated to a pay period. Net pay is what remains after taxes and other deductions. There is no universal net-pay percentage because withholding elections, benefits, location, and income differ.
Mandatory deductions: the ones you can't avoid
Federal income tax: Withheld based on your current Form W-4, which uses your filing status, dependents, other income, deductions, and any extra withholding you request. W-4 allowances were eliminated in 2020. A worker who had no federal income-tax liability last year and expects none this year may claim exemption from federal income-tax withholding; student status alone does not qualify someone.
State income tax: For tax year 2026, North Carolina's individual income tax rate is 3.99% of North Carolina taxable income. Payroll withholding is an estimate of the eventual tax bill, not necessarily 3.99% of each worker's gross paycheck.
Social Security tax (OASDI): 6.2% of your gross wages, up to an annual earnings cap. This funds Social Security retirement and disability benefits. Your employer matches your contribution.
Medicare tax: 1.45% of all wages with no earnings cap. Funds the federal health insurance program for seniors. Also matched by your employer.
Together, Social Security and Medicare taxes are called FICA (Federal Insurance Contributions Act) taxes, totaling 7.65% from your paycheck (plus another 7.65% from your employer that you don't see).
FICA Taxes
For covered employee wages, Social Security tax is generally 6.2% up to the annual wage base and Medicare tax is generally 1.45%, with matching employer amounts. Special worker, employer, and additional Medicare-tax rules exist. Self-employment tax uses related rates and permits adjustments described in current IRS guidance.
Voluntary deductions: choices that affect your paycheck
401(k) or 403(b) contributions: Traditional elective deferrals generally reduce current federal taxable income, while designated Roth contributions generally do not. Employer match formulas, vesting, and eligibility vary by plan.
Health, dental, and vision insurance premiums: If your employer offers group health coverage, your share of the premium is deducted from each paycheck. Employer-sponsored group coverage is typically cheaper than buying individual coverage.
Flexible Spending Account (FSA) or Health Savings Account (HSA) contributions: Pre-tax contributions for qualified medical expenses, reducing taxable income further.
Life insurance and disability insurance premiums: Additional coverage offered through employers at group rates.
Real-world example
An NC worker earning $42,000 in covered wages would have $2,604 withheld for Social Security and $609 for Medicare, using the 2026 employee rates of 6.2% and 1.45%. If the worker also directs 4% of pay to a traditional 401(k), that contribution is $1,680. Federal and NC income-tax withholding, health premiums, and final take-home pay depend on the worker's tax and benefit information, so they must be read from the actual pay stub rather than guessed from salary alone.
What is the difference between gross pay and net pay?
What do FICA taxes fund?
Why should you contribute at least enough to a 401(k) to get your employer's full match?
An NC worker has $42,000 in covered wages. Using employee FICA rates of 6.2% and 1.45%, what total is withheld for Social Security and Medicare?
A pay stub reconciles gross earnings with taxes and other deductions to produce net pay. Which deductions apply and whether they reduce taxable income depend on the worker, jurisdiction, benefit election, and plan; budget from the actual net amount.