Pay & Taxes
Your paycheck is confusing because nobody ever explains it. We do, so you can stop guessing and actually keep more of what you earn.
Why it matters
Most people overpay taxes because they don't understand withholding, or underpay and get hit with penalties at filing time. Your take-home pay is directly shaped by your W-4, your tax bracket, and whether you have side income or equity. Getting this right can mean hundreds or thousands of dollars more per year.
Want it explained, not just listed?
Understand your paycheck — walks you through it step by step.
What's actually in your paycheck
Federal income tax
The federal government's share of your income
The U.S. government collects a percentage of your income based on which tax bracket you fall into. On a $5,000/month salary (~$60k/year), most of your income is taxed at 12% federally, with a small portion at 22%. The amount withheld from each paycheck is an estimate. You true-up at tax time.
You can't change what you owe, but you can adjust how much is withheld each paycheck using your W-4. If you got a large refund last year, you may be over-withholding, meaning you're giving the government an interest-free loan. A more accurate W-4 puts that money in your pocket each month instead.
FICA (Social Security + Medicare)
FixedThese fund programs you'll use later
These are called FICA taxes (Federal Insurance Contributions Act). Social Security takes 6.2% of your gross pay up to $176,100/year (2025). Medicare takes 1.45% with no income cap. Your employer matches these amounts exactly, so the government actually receives double what you see withheld.
You cannot opt out of FICA. There is no withholding form adjustment available. The rate is fixed by law for all employees.
401(k) pre-tax
Your choicePre-tax money invested for your future self
A 401(k) lets you save for retirement with pre-tax dollars, meaning this money is deducted before taxes are calculated, which reduces your taxable income right now. On a $5,000 gross, contributing 7% ($350/month) reduces your taxable income to $4,650, saving you roughly $50–80/month in federal taxes alone. The money grows tax-deferred until retirement.
You control the contribution percentage. The 2025 limit is $23,500/year. If your employer matches contributions (e.g., 50% match up to 6%), you should contribute at least that much. It's an immediate 50% return on that portion. You can adjust your contribution rate anytime through your HR portal or benefits provider.
Your 401(k) contribution and your take-home
If you're contributing below 3%
Even 1% of your salary only costs a fraction of that in take-home, because it comes out before taxes hit. At $5,000/month, 1% ($50) reduces take-home by roughly $35–38 after the tax savings. And if your employer matches contributions, anything up to their threshold is effectively doubled — a guaranteed return nothing else can match.
If you're contributing 3–10%
For every dollar going to retirement, only about 72–78 cents comes out of your take-home. The rest is offset by lower taxes. At this range, you're likely capturing your employer match. The pre-tax discount means the real cost is always lower than the number on your paystub.
If you're contributing 10%+
You're saving well. The tax math compounds: not only does the money grow, but you're paying less to the IRS each month it stays in. Readers who want to model it exactly: open Paycheck OS, adjust the 401(k)% slider, and watch take-home change in real time.
Freelance or contract income?
Self-employment changes your taxes in ways a W-2 never does — quarterly payments, SE tax, the three-account system. We cover all of it.
Freelance taxes explained →Start here
Your Paycheck Is Smaller Than Your Salary. Here Is Exactly Why.
On a $55,000 salary, you might only take home $38,000 after taxes and deductions.
Read the guide
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10Put it into practice
Common questions
What is the difference between gross pay and net pay?
Gross pay is the salary or hourly rate your employer agreed to pay you. Net pay, your take-home, is what remains after federal and state income tax withholding, Social Security (6.2%), and Medicare (1.45%) are taken out. Pre-tax deductions like a 401(k) contribution or health insurance premium reduce your taxable income further, which is why two people with the same salary can have very different paychecks.
Will a raise push me into a higher tax bracket?
Only the dollars above the bracket threshold get taxed at the higher rate. The U.S. uses a marginal tax system. If a raise moves you from the 22% bracket into the 24% bracket, only the income above the cutoff is taxed at 24%. Your existing income keeps being taxed at the same rates. A raise never makes you take home less money.
How should I fill out my W-4?
The current W-4 (redesigned in 2020) no longer uses the old allowance system. For most single income households, completing Steps 1 and 5 is enough. Add Step 2 if you have a second job or a working spouse. Add Step 3 for the child tax credit. The goal is withholding the right amount: not a large refund (which is lending the IRS your money for free) and not a large bill at filing time.
How much extra tax do I owe if I freelance?
Freelancers owe self-employment tax (15.3%) on top of regular income tax. That 15.3% covers Social Security and Medicare, the half your employer normally pays for you when you are on payroll. You can deduct legitimate business expenses before calculating either tax. Most freelancers also need to make quarterly estimated tax payments to avoid underpayment penalties.
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