New on FinoLib · Volume V: Personal Finance
My latest article is now live on FinoLib, the free finance library I write: How to Read a Paycheck: Paychecks Decoded, from Volume V: Personal Finance. It is part 1 of a 2-part guide. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
The idea in plain words
Your paycheck is smaller than your salary because other people get paid first. Some pay is set aside before tax for things like retirement or health insurance. Then two different taxes are withheld: FICA, which is Social Security and Medicare, and income tax. They are worked out in different ways, so they don’t move together. That is why a bonus, a second job or a raise late in the year can make a check look odd. Nothing disappears; withholding is an estimate that is settled when you file your tax return.
Key points
■FICA is 7.65% of wages after cafeteria-plan premiums; a traditional 401(k) deferral lowers income tax but not FICA.
■Payroll withholds income tax as if each check were paid all year: $67,900 annualized, minus $16,100, gives $234.92 a check.
■Bonuses are usually withheld at a flat 22% federal rate (37% on supplemental pay above $1 million in a year).
■Each employer withholds as if its job were your only one: a couple earning $75,000 and $60,000 can come up $4,560 short by April without Step 2 of Form W-4.
A closer look
Every earlier section in this Part has referenced “take-home pay” without fully explaining how gross salary actually becomes it. This section closes that gap completely, using current 2026 U.S. federal rates on a real salary — the same worked example referenced throughout this Part.
Reading your own pay stub. Every stub shows a current-period column and a year-to-date (YTD) column. Three checks catch most errors, and they are worth doing on the first check of each year and after any change in pay or benefits:
Lines below net-of-tax pay, such as Roth 401(k) contributions, union dues or a garnishment, come out after both taxes and lower neither.
A worked example
Worked Example — Compare the Scenarios: Traditional 401(k), Roth 401(k), or Nothing
Same $75,000 salary, same $100 health premium, three choices for the 6% slot, with the common match of 50% of contributions up to 6% of pay (6.5). A Roth 401(k) contribution comes out after tax, so taxable income stays at $75,000 − $2,600 − $16,100 = $56,300, on which 2026 tax is $7,098, or $273.00 a check. FICA is $213.02 in every column because neither kind of 401(k) contribution reduces it. Per check unless noted A. Traditional 6% B. Roth 6% C.
Under the hood
Under the Hood: Why Withholding Treats Every Check as a Full Year
Your employer does not know your annual income; it knows this check. The IRS percentage method in Publication 15-T bridges the gap by annualizing: multiply the period’s taxable wages by the number of pay periods, subtract the standard deduction built into the tables, apply the year’s brackets, and divide back. For the running household: ($2,884.62 − $173.08 − $100.00) × 26 = $67,900; $67,900 − $16,100 = $51,800; tax on $51,800 is $6,108; $6,108 ÷ 26 = $234.92.
What the Data Says
Most filers get money back. In the 2026 filing season, the IRS reported an average refund of $3,273 on 97.9 million refunds through May 1, 2026, up 11.1% from $2,947 a year earlier. Not all of a refund is over-withholding, because refunds also pay out refundable credits such as the earned income tax credit.
Why It Matters
Notice what the 401(k) contribution actually did here: it reduced federal taxable income by $4,500, which — at a 22% marginal rate — saved roughly $990 in federal tax alone over the year, while simultaneously building retirement savings. That single mechanic, the tax-advantaged account lowering the amount income tax is even calculated on, is the entire subject of Part 6, and it’s worth re-reading this worked example again once you get there — the number $173.08 will mean considerably more…
More from the article
■Gross pay — the full salary or wage amount for the pay period, before anything is withheld.
■Pre-tax deductions — money diverted before federal income tax is calculated: traditional 401(k)/403(b) contributions, and health insurance premiums paid through an employer’s Section 125 cafeteria plan.
■Taxes withheld — federal income tax, state and local income tax where applicable, and FICA (Social Security and Medicare).
■Net pay — what actually deposits into your bank account, sometimes further reduced by post-tax deductions such as Roth 401(k) contributions or wage garnishments.
■The 401(k) line should equal your elected percentage of gross: 6% × $2,884.62 = $173.08.
■Federal income tax — $234.92 — $273.00
■Take-home pay — $2,163.60 — $2,125.52
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, How to Read a Paycheck: Paychecks Decoded, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance