How Payroll Tax Works: From Gross Pay to Net Paycheck

A paycheck looks simple — you earn a number, you get a smaller number. But the gap between gross and net is the sum of several separate taxes and deductions, each computed differently. Knowing how each piece works tells you where your money goes and how to change your take-home.

1. Gross pay: the starting number

Gross pay is everything you earn before anything is taken out. If you are salaried, it is your annual salary divided by the number of pay periods. If you are hourly, it is your hourly rate times the hours you worked (with overtime usually at 1.5x over the weekly threshold). Everything downstream — federal tax, FICA, state tax, deductions — is computed from this gross number.

gross (salaried) = annual salary / pay periods per year
gross (hourly)    = hourly rate × regular hours + 1.5 × hourly rate × OT hours

A $60,000 salary paid biweekly gives $60,000 / 26 = $2,308 gross per paycheck. The same person earning $30/hour for 80 regular hours is $30 × 80 = $2,400 gross. Gross is the ceiling; everything below shrinks it.

2. Federal income tax: brackets, not a flat rate

The US federal income tax is progressive: your income is split into slices, and each slice is taxed at the rate for its bracket. A common misconception is that earning more pushes your whole income into a higher bracket — it does not. Only the dollars above each bracket line are taxed at the higher rate.

taxable income = gross − pre-tax deductions − standard deduction
tax = sum over brackets: rate × (income within that bracket)

For a 2024 single filer with the $14,600 standard deduction, the first $11,600 of taxable income is taxed at 10%, the next $35,550 at 12%, and so on up through seven brackets topping out at 37%. Your marginal rate is the rate on your last dollar; your effective rate (total tax divided by income) is always lower and is the one that reflects what you actually pay.

3. FICA: the flat payroll tax

FICA is Social Security plus Medicare. Unlike income tax it is flat: Social Security takes 6.2% of wages up to an annual cap ($168,600 in 2024), and Medicare takes 1.45% of all wages with no cap. Employers match both halves; if you are self-employed you pay both halves yourself (the SECA tax, roughly 15.3%).

social security = 6.2% × min(gross, wage cap)
medicare        = 1.45% × gross
FICA            = social security + medicare

Because FICA is flat and uncapped on the Medicare side, it is the larger tax for many low and middle earners, and it does not shrink when you contribute to a traditional 401(k) the way income tax does — FICA still applies to that money.

4. State income tax (and the states with none)

Most states levy an income tax on top of the federal one, with their own brackets or a flat rate. A handful — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax on wages, and New Hampshire only taxes interest and dividends. Where you live can change your take-home by several percent, which is why two identical salaries in different states produce different net paychecks.

5. Pre-tax vs post-tax deductions

Deductions are subtracted from gross, but when they are subtracted changes their effect. Pre-tax deductions (traditional 401(k) contributions, many health-insurance premiums, HSA contributions) come out before income tax is computed, so they lower your taxable income and your income-tax bill. Post-tax deductions (Roth 401(k), garnishments, some life insurance) come out after tax, so they reduce net pay but not taxable income.

The same dollar is worth more as a pre-tax deduction because it never gets taxed. This is why a 6% pre-tax 401(k) contribution costs less than 6% of your gross in net pay — the missing income tax partly offsets it.

Putting it together: gross to net

The full chain is: start with gross, subtract pre-tax deductions to get taxable income, compute federal and state income tax on that, compute FICA on the original gross, then subtract FICA, income tax, and post-tax deductions. What is left is net pay.

net = gross − pre-tax − FICA − federal tax − state tax − post-tax

A $60,000 single filer with no deductions typically nets roughly $45,000-$47,000 depending on state — about 75-78% of gross. The exact number depends on bracket placement, the state rate, and whether anything is being contributed pre-tax.

Try it yourself

The Payroll Calculator walks a salary or hourly gross all the way to a net paycheck with federal brackets, FICA, an optional state rate, and pre- and post-tax deductions. To turn an hourly rate into an annual figure first, the Salary Calculator converts between hourly and annual pay, and the Time Card Calculator totals weekly hours (including overnight shifts and overtime) into a gross wage.