Gross vs. Net Income: What Gets Deducted

You accepted a job at $65,000 a year. You divided by 12 and expected roughly $5,417 a month. Then your first paycheck arrived, and it was more like $4,100. Where did the rest go?

The gap between your gross income (what your employer pays you) and your net income (what actually hits your bank account) can be shocking if you've never broken it down. Let's walk through every deduction, explain why each exists, and help you understand exactly where your money goes.

Gross Income: The Starting Point

Your gross income is the total amount your employer pays you before any deductions. If your offer letter says $65,000, that's your gross annual salary. For hourly workers, it's your hourly rate times hours worked. Gross income also includes overtime, bonuses, commissions, and tips.

This is the number you use when someone asks "how much do you make?" and the number that appears at the top of your pay stub. But it's not real in the sense that you never actually receive this amount.

The Deductions: Where Your Money Goes

Between gross and net, your paycheck passes through a gauntlet of deductions. Some are mandatory (taxes), some are voluntary but strongly encouraged (retirement contributions), and some depend on your benefits elections (health insurance).

Federal Income Tax

This is usually the biggest deduction. The amount depends on your taxable income and filing status. The U.S. uses a progressive tax system with seven brackets (for 2024: 10%, 12%, 22%, 24%, 32%, 35%, and 37%). Your employer withholds an estimated amount each paycheck based on the W-4 form you filled out when you were hired.

On $65,000 as a single filer taking the standard deduction ($14,600 for 2024), your taxable income is $50,400. You'd owe roughly $6,700 in federal income tax, or about $558/month withheld from your paychecks. Your effective federal tax rate works out to about 10.3%.

State Income Tax

This varies wildly. Nine states have no income tax at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). Others range from flat rates around 3-5% to progressive brackets topping out at 10-13%. On $65,000 in a state with a 5% effective rate, that's another $3,250/year or $271/month.

Some cities and counties also levy their own income taxes. New York City residents, for example, pay city income tax on top of state and federal.

Social Security Tax (OASDI)

You pay 6.2% of your gross income toward Social Security, up to the wage base limit ($168,600 for 2024). Your employer matches this amount. On $65,000, that's $4,030/year or $336/month. This funds retirement benefits, disability insurance, and survivor benefits through the Social Security Administration.

Medicare Tax

You pay 1.45% of all gross income toward Medicare, with no wage cap. Your employer matches this too. On $65,000, that's $943/year or $79/month. If you earn over $200,000 (single) or $250,000 (married filing jointly), you pay an additional 0.9% Medicare surtax on earnings above those thresholds.

FICA Combined

Social Security and Medicare together are called FICA taxes (Federal Insurance Contributions Act). Combined, you pay 7.65% of your gross income. On $65,000, that's $4,973/year or $414/month. This is a flat tax - everyone pays the same percentage regardless of income (until the Social Security wage cap).

See Your Tax Breakdown

Plug in your salary below to see a detailed breakdown of federal income tax, FICA taxes, and your estimated take-home pay.

Voluntary Deductions (Pre-Tax)

These come out before taxes are calculated, which means they reduce your taxable income and save you money:

401(k) or 403(b) Contributions

If you contribute 6% of your salary to a traditional 401(k), that's $3,900/year or $325/month. But because it's pre-tax, it reduces your taxable income to $61,100. At a 22% marginal tax rate, that $3,900 contribution only reduces your take-home pay by about $3,042. You're essentially getting a $858 tax discount on your retirement savings.

Health Insurance Premiums

According to the Bureau of Labor Statistics, employer-sponsored health insurance costs average about $7,900/year for single coverage, with the employee paying roughly $1,400/year (about $117/month). For family coverage, total costs average $22,400, with employees paying around $6,100/year ($508/month). These premiums are typically deducted pre-tax through a Section 125 cafeteria plan.

HSA or FSA Contributions

Health Savings Accounts (if you have a high-deductible health plan) and Flexible Spending Accounts let you set aside pre-tax dollars for medical expenses. HSA contributions for 2024 are capped at $4,150 for individuals and $8,300 for families. FSAs are capped at $3,200.

Dental and Vision Insurance

Typically much smaller - $20-$50/month for dental, $5-$15/month for vision - but they still add up over the year.

Voluntary Deductions (Post-Tax)

Some deductions come out after taxes are calculated:

• Roth 401(k) contributions: Same contribution limits as traditional 401(k), but no tax break now - you pay taxes on the money going in but get tax-free withdrawals in retirement.
• Life insurance: Employer-provided coverage above $50,000 is taxable, and additional voluntary coverage premiums come out post-tax.
• Disability insurance: If you pay premiums post-tax, any disability benefits you receive later are tax-free.
• Union dues: Typically deducted post-tax.
• Wage garnishments: Court-ordered deductions for child support, student loan default, or other debts.

A Complete Example: $65,000 Salary

Let's put it all together for a single filer in a state with 5% income tax, contributing 6% to a 401(k) and paying standard health insurance premiums:

• Gross annual salary: $65,000
• 401(k) contribution (6%): -$3,900
• Health insurance premiums: -$1,400
• Taxable income (approximate): $59,700
• Federal income tax: -$6,100 (estimated on reduced taxable income)
• State income tax (5%): -$2,985
• Social Security (6.2%): -$4,030
• Medicare (1.45%): -$943
• Dental/vision: -$360

Net annual take-home: approximately $45,282

Net monthly take-home: approximately $3,774

That's about 58% of your gross salary. Nearly $20,000 a year went to taxes, retirement savings, and insurance. Understanding this breakdown is crucial for building a realistic budget.

Why This Matters for Your Budget

The single biggest budgeting mistake people make is planning around their gross income instead of their net. If you're budgeting with $5,417/month in mind but only receiving $3,774, you'll overspend every single month. Always build your budget around your net pay - the number that actually shows up in your bank account.

Some quick tips:

• Check your most recent pay stub for your exact deductions. Don't estimate - look at the real numbers.
• Review your W-4 annually. If you got a big refund last year, you're over-withholding (giving the government an interest-free loan). Adjust your W-4 to keep more per paycheck.
• Don't forget about irregular income. Bonuses are typically withheld at a flat 22% federal rate, which may be more or less than your actual rate.

The Bottom Line

The gap between gross and net income is one of the first things every working adult needs to understand. It's not just about taxes - it's about retirement savings, insurance, and other benefits that eat into your take-home pay. Once you know your real numbers, you can budget accurately, negotiate smarter, and make informed decisions about benefits enrollment. Check your next pay stub with fresh eyes and make sure you understand every line.