How Much Does a Dollar Raise Add to Your Paycheck?

Receiving a pay raise can be exciting, offering the promise of increased financial flexibility. However, the amount that actually appears in your bank account often differs from the gross raise announced. Several factors influence how much of that extra dollar per hour translates into take-home pay, making it helpful to understand the deductions involved.

Understanding Your Gross Pay Increase

When you receive a raise, the first step is to determine its gross impact on your earnings before any deductions. A $1 per hour raise means your gross pay increases by $1 for every hour worked. For an employee working a standard 40-hour week, this translates to an additional $40 in gross weekly pay. If you are paid bi-weekly, your gross pay would increase by $80 per pay period, assuming a consistent 80 hours worked. This calculation provides the raw increase, representing the total amount your employer adds to your compensation before any money is withheld. This gross amount is the starting point for all deductions.

Key Deductions Affecting Your Paycheck

The journey from your gross pay increase to your net take-home amount involves several mandatory and elective deductions. These withholdings reduce your taxable income and contribute to various government programs and benefits. Understanding these deductions helps clarify why your net pay increase is less than your gross raise.

Federal income tax is a significant deduction, operating under a progressive tax system. The additional dollar of income from your raise will be subject to your marginal tax rate, which is the rate applied to your last dollar of earned income. This marginal rate can be higher than your overall effective tax rate, as it only applies to the new income falling into a specific tax bracket.

FICA taxes are mandatory payroll taxes that fund Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% of your gross wages, applied up to an annual wage base limit of $176,100. Earnings above this threshold are not subject to the Social Security tax. The Medicare tax rate is 1.45% of all your gross wages, with no income cap.

State income tax further reduces your paycheck, though its application varies widely across the United States. Some states do not impose an income tax, while others have flat tax rates or progressive systems similar to federal income tax. Your specific state’s tax structure is important, as the marginal rate for your state income tax will also apply to your increased earnings. Additionally, some cities or local jurisdictions may levy their own income taxes, adding another layer of deduction.

Beyond these mandatory taxes, many employees contribute to pre-tax deductions. Common examples include contributions to a 401(k) retirement plan or health insurance premiums. These deductions are typically taken from your gross pay before federal, state, and in some cases, local income taxes are calculated. This reduces your taxable income.

Steps to Calculate Your Net Pay Increase

To determine the actual take-home impact of a $1 per hour raise, a systematic calculation considering all deductions is necessary. This process helps translate your gross increase into a precise net amount you can expect in your paycheck.

First, identify your gross pay increase per pay period. For instance, if you work 40 hours per week and are paid bi-weekly, a $1 per hour raise results in an $80 gross increase ($1/hour 40 hours/week 2 weeks).

Next, calculate the FICA deductions on this additional gross amount. Using the 2025 rates, you would subtract 6.2% for Social Security (up to the annual wage base limit) and 1.45% for Medicare from your gross raise. For example, on an $80 gross increase, this would be $4.96 for Social Security ($80 0.062) and $1.16 for Medicare ($80 0.0145), totaling $6.12 in FICA taxes.

Consider any pre-tax deductions that might change with your raise. If your contributions to a 401(k) are a fixed percentage of your pay, then a raise will automatically increase your contribution, reducing your taxable income. However, if your contributions are a fixed dollar amount, they would not change with the raise and thus would not impact the taxable portion of your new earnings.

After accounting for FICA and any changes in pre-tax deductions, estimate the income taxes on the remaining portion of your raise. This involves applying your marginal federal income tax rate, and potentially your state and local marginal income tax rates, to the taxable segment of your raise. For example, if your combined marginal federal and state income tax rate is 25%, you would subtract 25% of the remaining taxable increase.

Finally, subtract all calculated deductions—FICA, federal income tax, state income tax, local income tax (if applicable), and any increased pre-tax contributions—from your initial gross raise. This final subtraction provides your net pay increase. For instance, if your $80 gross raise faced $6.12 in FICA and an estimated $18.47 in combined income taxes (assuming a 25% marginal rate on the remaining $73.88 after FICA), your net increase would be approximately $55.41.