Your gross salary is the total of your taxable income but, unfortunately, all that money is not going to show up in your paycheck. Your employer will take numerous payroll deductions from that gross amount, and you get what’s left. Those deductions include the inevitable taxes you must pay, but other things can be subtracted from your gross pay as well. The result is your net salary, sometimes referred to as take-home pay.
You shouldn’t be left in the dark as to how your employer arrived at your net pay. Your pay stub should show exactly what was deducted from your gross salary and how much, according to the Social Security Administration.
Income Tax Deductions
There’s no way to avoid income tax deductions from your pay. Federal income tax must be withheld from your gross pay whether you’re a salaried employee or you earn an hourly wage. The U.S. income tax is a progressive tax, so the bite becomes more significant as you earn more. Your employer will withhold the required amount per pay period and send these payroll taxes to the government on your behalf.
This may be the beginning and end of your income tax withholding if you happen to live in a state that doesn’t impose an income tax. Nine states decline to tax earned income as of 2022, according to the Tax Foundation: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming, New Hampshire and Washington. New Hampshire and Washington tax interest, dividends and capital gains in some cases but not salaries or wages.
State income taxes will be withheld from your gross earnings as well if you don’t live and/or work in one of these states, and ADP indicates that some cities impose a local income tax too.
Social Security and Medicare Taxes
Your employer will take another percentage of your gross pay for FICA taxes: Social Security and Medicare. The good news about the Social Security tax is that it’s only applicable up to a certain gross annual income limit: $147,000 in 2022, increasing to $160,200 in 2023, according to the Social Security Administration. Your employer won’t withhold Social Security taxes on anything you earn over these amounts.
Social Security is withheld from your gross pay at the rate of 6.2 percent on earnings below these thresholds, and Medicare is withheld at 1.45 percent. Unfortunately, there’s no contribution base for Medicare. All your earnings are subject to this tax, and you’ll be liable for the Additional Medicare Tax too, according to the IRS, at earnings of $200,000, increasing to $250,000 for married taxpayers who file joint returns.
Other Withholdings From Your Gross Pay
Deductions that contribute to gross pay vs. net pay differences don’t necessarily stop here. Your employer might withhold an amount of money toward your health insurance premiums or life insurance premiums. Your retirement contributions will be deducted from your gross income if you’re paying into a retirement plan through your company. However, these are all voluntary deductions.
Your gross pay can also be subject to wage garnishment if a lender sues you in court for an unpaid debt and gets a judgment against you for the amount you owe. Sometimes, obligations like child support and alimony can be withheld by court order as well.
Many of these deductions (except for garnishments, child support and alimony) tend to be made pretax before taxes are calculated on your gross wages that remain, according to the Consumer Financial Protection Bureau.
Adjusting Your Net Income
As for those income taxes, the amount withheld from your paychecks is within your control, but what you’ll ultimately owe the IRS is not. You might elect to have just $100 a week withheld from your pay, but you’ll have to come up with a lump sum payment of cash to the IRS or your state if you complete your tax returns and it turns out that you owe more. The total amount must be paid by tax day one way or the other.
Your tax withholding is based on information you provide to your employer when you complete IRS Form W-4. The form includes information that can affect your adjusted gross income, or AGI, at tax time – the amount on which you’ll owe taxes after taking certain tax deductions for which you qualify. This information includes your filing status and the number of dependents you’re supporting. These factors directly affect how much you’ll ultimately pay in income taxes and how much withholding is necessary to meet that obligation.
You can make other adjustments on your W-4 as well to reduce or increase the withholding amounts from your annual salary. However, you’ll want to come as close as possible to what you’ll owe the IRS at year’s end to avoid a big, unpleasant tax bill.
The IRS provides a withholding calculator on its website to help you complete your W-4 correctly so you come as close as possible to paying in what you owe through withholding.
- Social Security Administration: Gross and Net Income: What’s the Difference?
- Social Security Administration: Contribution and Benefit Base
- ADP: Gross Pay vs. Net Pay: What’s the Difference?
- IRS: Topic No. 560 Additional Medicare Tax
- IRS: Tax Withholding
- Consumer Financial Protection Bureau: Understanding Paycheck Deductions
- Tax Foundation: State Individual Income Tax Rates and Brackets for 2022
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.