What Is a Paycheck? Gross Pay, Net Pay, and Deductions

A paycheck is an employee’s compensation for work performed, detailing earnings and amounts withheld. It provides a transparent overview of how total compensation is calculated and reduced by deductions. Understanding its components helps individuals manage personal finances.

Understanding Gross Pay and Net Pay

Gross pay is the total amount an employee earns before any deductions are subtracted. It includes regular wages or salary, along with any overtime pay, bonuses, commissions, or other forms of compensation. For hourly employees, gross pay is calculated by multiplying the hourly rate by the number of hours worked, including any applicable overtime rates. Salaried employees typically have a fixed annual salary, and their gross pay per period is determined by dividing that annual amount by the number of pay periods in the year.

Net pay, often referred to as take-home pay, is the amount an employee receives after all deductions are subtracted from their gross pay. This is the final sum deposited into a bank account or provided as a physical payment. The difference between gross and net pay can be significant due to mandatory and voluntary deductions.

Common Paycheck Deductions

Numerous deductions are withheld from an employee’s gross pay, falling into either mandatory or voluntary categories. Mandatory deductions are required by law and include federal income tax, state income tax (where applicable), and Federal Insurance Contributions Act (FICA) taxes. Federal income tax withholding is based on information provided by the employee on Form W-4 and follows a progressive tax system. State income tax varies by jurisdiction, with some states having no income tax, while others require withholding from wages.

FICA taxes fund Social Security and Medicare programs. For 2025, the Social Security tax rate is 6.2% for employees, applied to earnings up to a wage base limit of $176,100. The Medicare tax rate is 1.45% for employees, with no wage limit. An additional Medicare tax of 0.9% is withheld from wages exceeding $200,000. Beyond these, other mandatory deductions can include court-ordered wage garnishments for obligations such as child support or unpaid taxes.

Voluntary deductions are those an employee authorizes to be withheld from their pay, often for benefits or personal savings. Health insurance premiums are a common voluntary deduction, often taken on a pre-tax basis, which reduces the employee’s taxable income. Contributions to retirement plans, such as a 401(k), are another popular pre-tax deduction, with the elective deferral limit for 2025 increasing to $23,500. Flexible Spending Accounts (FSAs) allow employees to contribute pre-tax dollars for qualified medical or dependent care expenses, with the 2025 medical FSA contribution limit set at $3,300. Other voluntary deductions might include union dues or charitable contributions.

Receiving Your Pay

Employees typically receive their net pay through several common methods. Direct deposit is a prevalent and secure option, involving the electronic transfer of funds directly into a designated bank account. This method utilizes the Automated Clearing House (ACH) network to process transactions efficiently. To set up direct deposit, an employee provides their bank account and routing numbers to their employer.

Another method is the traditional paper check, a physical document issued by the employer that the employee must manually deposit or cash. While still used, paper checks are becoming less common due to the increased efficiency and security of electronic payment methods.

Pay cards offer an alternative for employees who may not have a traditional bank account. These prepaid debit cards are loaded electronically with the employee’s net pay each pay period. Pay cards function similarly to standard debit cards, allowing employees to make purchases, pay bills, or withdraw cash from ATMs.