How Much More Is a Dollar Raise After Taxes?

When you receive a pay raise, the full amount rarely translates directly into your take-home pay. This is because various deductions are applied to your gross income before it reaches your bank account. Understanding the difference between your gross pay—the total amount you earn—and your net pay—the amount you actually receive after all deductions—is important for managing your finances. A raise adds to your gross income, but a portion of that new income will be allocated to taxes and other contributions, reducing the immediate financial benefit.

How Income Taxes Affect Your Raise

A significant portion of any pay raise is subject to income taxes levied at federal, state, and sometimes local levels. The federal income tax system in the United States operates on a progressive scale, meaning different portions of your income are taxed at increasing rates, known as tax brackets. For 2025, federal income tax rates range from 10% to 37% for individual taxpayers. A common misconception is that a raise pushes all your income into a higher tax bracket; however, only the portion of your income that falls within a higher bracket is taxed at that higher marginal rate. For example, if a raise moves a single filer’s income from the 12% bracket into the 22% bracket, only the income exceeding the 12% bracket threshold is taxed at 22%.

Beyond federal taxes, many states also impose their own income taxes, further reducing the net value of a raise. State income tax systems vary widely. Some states, such as Alaska or Texas, do not levy a state income tax. Other states apply a flat tax rate, while most utilize a progressive system with multiple tax brackets. For instance, North Carolina has a flat income tax rate, while California has a progressive system.

In addition to federal and state income taxes, some cities and local jurisdictions also impose their own income or earnings taxes. These local taxes add another layer of deduction from your gross pay. For example, cities like New York City or Philadelphia have local income taxes. The combined effect of federal, state, and local income taxes means a substantial portion of any raise will be withheld.

Required Payroll Deductions

Beyond income taxes, mandatory payroll deductions, often referred to as FICA taxes, also reduce your take-home pay from a raise. These include contributions for Social Security and Medicare, which fund federal programs providing retirement, disability, and healthcare benefits. Both employees and employers contribute to FICA taxes.

For Social Security, employees contribute 6.2% of their gross wages. This tax only applies up to an annual wage base limit, which is $176,100 for 2025. Any earnings above this threshold are not subject to Social Security tax.

Medicare tax is also withheld from employee wages at a rate of 1.45%. Unlike Social Security, there is no wage base limit for Medicare tax, meaning every dollar of your gross income, including any raise, is subject to this deduction. Additionally, an extra 0.9% Additional Medicare Tax applies to wages exceeding $200,000 for individual filers. These mandatory FICA deductions are consistently applied to your earnings, reducing the net impact of a pay raise.

Voluntary Pre-Tax Deductions

Voluntary pre-tax deductions can also influence the net impact of a pay raise, often to your financial benefit. These deductions reduce your taxable income, lowering your overall tax liability, even though they decrease your immediate take-home pay. Common examples include contributions to retirement accounts, health insurance premiums, and health savings accounts (HSAs) or flexible spending accounts (FSAs).

Contributions to employer-sponsored retirement plans, such as a 401(k) or 403(b), are typically made on a pre-tax basis. For 2025, employees can contribute up to $23,500 to a 401(k) plan, with an additional $7,500 catch-up contribution allowed for those aged 50 and over. If your contributions are set as a percentage of your salary, a raise automatically increases the dollar amount you save for retirement. This increased contribution further reduces your taxable income, lowering federal and state income tax withheld.

Health insurance premiums are often deducted from your paycheck before taxes, reducing your taxable income. Similarly, contributions to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are made with pre-tax dollars. For 2025, individuals with self-only high-deductible health plan coverage can contribute up to $4,300 to an HSA, while those with family coverage can contribute up to $8,550, plus a $1,000 catch-up contribution for those aged 55 and older. The maximum contribution for a health Flexible Spending Account (FSA) in 2025 is $3,300. These pre-tax contributions strategically reduce your current tax burden while funding healthcare or retirement savings, despite meaning less cash in your immediate paycheck.

Calculating Your Net Take-Home Pay

To understand the actual impact of a raise, calculate your net take-home pay by factoring in deductions. Consider a hypothetical $100 monthly raise for a single individual earning $60,000 annually, who contributes to a 401(k) and lives in a state with a 5% income tax. This individual is below the Social Security wage base limit and the Additional Medicare Tax threshold.

The $100 monthly raise adds to the gross income. Federal income tax applies based on the marginal tax rate. For a single filer with $60,000 in taxable income in 2025, a portion falls into the 22% federal income tax bracket. Approximately $22 of the $100 raise would be withheld.

Next, required payroll deductions apply. Social Security tax at 6.2% accounts for $6.20 of the raise. Medicare tax at 1.45% deducts another $1.45. Combined, these FICA taxes reduce the monthly raise by $7.65.

Then, state income tax applies. With a hypothetical 5% state income tax rate, an additional $5.00 would be withheld. If the individual contributes 5% of their income to a pre-tax 401(k) plan, this voluntary deduction increases by $5.00 due to the raise. This $5.00 also reduces the taxable income for federal and state taxes, effectively lowering those tax amounts slightly, though for this simplified example, we are showing the direct deduction from the gross raise.

In this scenario, from a $100 monthly raise, approximately $22 (federal tax) + $7.65 (FICA) + $5.00 (state tax) + $5.00 (401(k)) = $39.65 would be deducted. This leaves a net increase of about $60.35 in monthly take-home pay. This illustrates that while a raise increases your financial capacity, the actual amount received is significantly less than the gross increase due to various taxes and deductions. To determine the precise net value of your own raise, use your specific tax bracket, state and local tax rates, and personal deduction percentages.