Where Your Paycheck Actually Goes: Every US Deduction Explained
The gap between the salary you negotiated and the number that lands in your bank account is usually 25–35%. Here is exactly where it goes, in the order payroll actually applies it.
The order of operations matters
This is the single most misunderstood thing about payroll. Deductions are not applied to the same base. They cascade:
Gross pay
− Pre-tax deductions → Federal taxable wages
− Federal income tax
− FICA (Social Security + Medicare) ← calculated on a DIFFERENT base
− State & local income tax
− Post-tax deductions
= Net pay (take-home)
The consequence: a dollar contributed to a traditional 401(k) reduces your federal income tax but not your Social Security or Medicare tax. A dollar paid toward health insurance premiums under a Section 125 plan reduces both. These are not equivalent, and most paycheck estimators get this wrong.
Step 1: Pre-tax deductions
These come off the top and shrink the wages that get taxed.
| Deduction | Reduces federal income tax | Reduces FICA |
|---|---|---|
| Traditional 401(k)/403(b) | Yes | No |
| Health, dental, vision premiums (Section 125) | Yes | Yes |
| HSA via payroll | Yes | Yes |
| FSA (medical or dependent care) | Yes | Yes |
| Commuter/parking benefits | Yes | Yes |
| Roth 401(k) | No | No |
| Group life over $50k | No (it adds imputed income) | No |
The Section 125 rows are the quiet win. Paying health premiums through payroll rather than post-tax saves you an extra 7.65% on top of your marginal income tax rate.
2026 contribution limits:
- 401(k)/403(b) elective deferral: $24,500 ($32,000 if 50+; higher catch-up for ages 60–63)
- HSA: $4,400 self-only, $8,750 family (+$1,000 if 55+)
- Health FSA: $3,400
Step 2: Federal income tax
Withholding is driven by the W-4 you filed, not by a simple bracket lookup. Since the 2020 redesign there are no more "allowances." The form collects:
- Step 1: filing status
- Step 2: multiple jobs / working spouse adjustment
- Step 3: dependent credits, entered as an annual dollar amount
- Step 4a: other income (interest, dividends, gig work)
- Step 4b: deductions beyond the standard deduction
- Step 4c: extra flat withholding per paycheck
Payroll annualizes your paycheck, subtracts the standard deduction and your Step 4b entry, applies the bracket table, subtracts Step 3 credits divided across pay periods, then adds Step 4c.
2026 standard deduction: $16,100 single, $32,200 married filing jointly, $24,150 head of household.
2026 federal brackets (single):
| Rate | Taxable income |
|---|---|
| 10% | $0 – $12,400 |
| 12% | $12,400 – $50,400 |
| 22% | $50,400 – $105,700 |
| 24% | $105,700 – $201,775 |
| 32% | $201,775 – $256,225 |
| 35% | $256,225 – $640,600 |
| 37% | $640,600+ |
Brackets are marginal - nobody loses money from a raise
The most persistent payroll myth. If you are single with $50,000 taxable income and get a $2,000 raise, only the portion above $50,400 is taxed at 22%. The first $50,400 is still taxed at 10% and 12%.
A raise never reduces take-home pay. (Benefit cliffs in means-tested programs can behave that way. Tax brackets cannot.)
Why bonuses look overtaxed
Supplemental wages under $1 million are withheld at a flat 22%, plus FICA and state. If your actual marginal rate is 12%, too much was withheld and you get it back at filing. If your marginal rate is 32%, too little was withheld and you may owe. Nothing about your bonus is "taxed at a higher rate" - only withheld differently.
Step 3: FICA - the flat one
Two separate taxes, and unlike income tax there is no standard deduction and no bracket structure.
Social Security: 6.2% on wages up to the 2026 wage base of $184,500. Above that, it stops. Employer pays a matching 6.2%.
Medicare: 1.45% on all wages, no cap. Employer matches.
Additional Medicare: 0.9% on wages above $200,000 (single filer withholding threshold). Employee only - no employer match.
Combined employee FICA is 7.65% up to the wage base. Note that employers pay an equal amount; economists broadly agree this cost is ultimately borne by workers through lower wages, which means the real burden is closer to 15.3%. If you are self-employed you pay all of it explicitly.
The September pay bump: high earners see take-home rise mid-year when they cross the Social Security wage base and 6.2% stops coming out. It resets every January.
Step 4: State and local income tax
This is where geography swings your net pay by thousands.
No state income tax (9 states): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
Flat-rate states include: Arizona (2.5%), Colorado (4.25%), Illinois (4.95%), Indiana (3.0%), Kentucky (4.0%), Michigan (4.25%), North Carolina (4.25%), Pennsylvania (3.07%), Utah (4.55%).
Highest top marginal rates: California (13.3% over $1M), Hawaii (11%), New York (10.9%), New Jersey (10.75%), Oregon (9.9%).
Then local taxes stack on top:
- NYC: 3.078%–3.876% city tax on top of NY state
- Philadelphia: 3.75% wage tax (residents)
- Ohio: hundreds of municipal taxes, typically 1–3%
- Maryland: county tax of 2.25%–3.20%
- Several states add mandatory SDI/PFML payroll deductions - CA SDI, NY PFL, WA Cares, NJ TDI
A $120,000 salary produces meaningfully different take-home in Austin, Portland, and Manhattan, and it is not close.
Step 5: Post-tax deductions
Applied last, no tax benefit:
- Roth 401(k) contributions
- Wage garnishments and child support (these have federal limits under the CCPA)
- Union dues
- Repayment of payroll advances
- Charitable giving programs
- Disability insurance you elected post-tax - which, notably, makes any future benefit payments tax-free
A full worked example
$95,000 salary, single, Illinois, biweekly (26 periods), 6% to traditional 401(k), $180/month health premium.
Per paycheck gross: $95,000 / 26 = $3,653.85
| Line | Amount | Running base |
|---|---|---|
| Gross | $3,653.85 | - |
| 401(k) @ 6% | −$219.23 | reduces income tax only |
| Health premium | −$83.08 | reduces income tax + FICA |
| FICA base | $3,570.77 | gross − health |
| Social Security 6.2% | −$221.39 | |
| Medicare 1.45% | −$51.78 | |
| Federal taxable | $3,351.54 | gross − 401k − health |
| Federal income tax | −$479.00 | |
| IL flat 4.95% | −$165.90 | |
| Net pay | $2,433.47 |
Take-home is 66.6% of gross. Of the 33.4% withheld, about 8.3 points went into your own 401(k) and HSA-style benefits - that is deferred compensation, not tax.
Three things worth doing this week
- Check your withholding. Multiply your latest federal withholding by pay periods remaining and compare to last year's total tax. A large refund is an interest-free loan to the government; a large balance due can trigger underpayment penalties. Adjust with Step 4c on a new W-4.
- If you have two jobs or a working spouse, complete W-4 Step 2. Skipping it is the number one cause of surprise April tax bills, because each employer withholds as though its salary is your only income.
- Move health premiums pre-tax if they are not already. It is a 7.65% swing for zero effort.
Run your own numbers in the paycheck calculator - it applies the cascade in the correct order, including the separate FICA base. Then check what that take-home supports with the mortgage calculator.
Key takeaways
- Deductions cascade; 401(k) and Section 125 benefits do not reduce the same tax base
- Tax brackets are marginal - a raise can never lower your take-home pay
- Bonuses are withheld at a flat 22%, not taxed at a special rate
- FICA is 7.65% up to the $184,500 wage base for 2026, then drops to 1.45%
- State and local tax can differ by 10+ percentage points on identical salaries
- Expect take-home around 65–75% of gross, with much of the gap being your own retirement savings
Figures reflect 2026 federal parameters. Verify current-year numbers with IRS Publication 15-T and your state revenue department. This is general information, not tax advice.