The Basics of a Paycheck

Basic definitions

Gross Payroll: Total amount of money an individual earned before taxes and deductions.

Deductions: Amounts that are subtracted from an employees’ pay including taxes and other pre and post-tax deductions.

Reimbursements: Amounts repaid to an employee for expenses incurred by that employee related to the business.

Federal Income Tax Withholding: Amount withheld for payment of an individual’s Federal Tax on their income. This amount is determined by an employee’s Form W-4.

Federal Insurance Contributions Act (FICA): Taxes withheld from an individual’s paycheck that go toward Social Security and Medicare.

State Income Tax: Amount withheld for payment of an individual’s State Tax on their income.

Net Paycheck: Gross payroll minus all applicable taxes and other deductions.


What deductions come out of my paycheck? Good question. There are four main tax deductions that are withheld from your gross pay. They are:

1)         Medicare tax: Medicare tax is a payroll tax. It falls under the Federal Insurance Contributions Act (FICA). It is taken out of an individual’s check in support of, you guessed it, Medicare. The 2016 Medicare tax rate for employees is 1.45%. This rate is good for wages up to $200,000 for 2016. Any excess wages after $200,000 are subject to an additional 0.9% rate on top of the 1.45%.

2)         Social Security Tax: Social Security tax also falls under FICA and is a payroll tax. Just as Medicare it is withheld for the support of Social Security. The employee and employer pay 6.2%. Individuals are only taxed up to $118,500 for 2016. There are no additional withholdings after the $118,500 is exceeded.

3)         Federal Income Tax Withholding: Amount withheld for payment of an individual’s Federal Tax on their income. The amount that is withheld depends on three things: the paycheck amount, filing status, and number of allowances. When hired your form W-4 allows you to choose your filing status and number of allowances. You can file at a single rate or married rate. You can also choose to withhold an additional amount.

4)         State/Local Income Tax: If you’re lucky enough to live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming then state income tax is something you don’t have to worry about. As for the other 43 states in the U.S. state income tax is something that is deducted from your gross pay amount. Most states that levy states income tax work much like federal income tax as the rate comes from a form similar to a W-4. Some states have a flat tax rate meaning everyone pays the same rate for all income levels; these states are Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah. Their rates range between 3-5.2%. Tennessee and New Hampshire only tax dividends and interest income.

Net Check

Here’s how your net check amount is calculated:

Gross Payroll

-Minus Pre-Tax Deductions

-Minus Federal Tax Withholdings and FICA

-Minus State/Local Income Tax (if applicable)

-Minus Post-Tax Deductions

+Non-taxable Reimbursements

=Equals Net Paycheck