Why Is My Gross Pay Less Than My Salary?
Learn the reasons your gross pay is less than your expected salary. This guide clarifies common withholdings and how to interpret your pay stub.
Gross pay is the total amount earned before any deductions, encompassing salary, wages, bonuses, and commissions. The actual amount an employee receives, known as net pay, is less than gross pay because various deductions are subtracted before the final payment is made. Net pay is the amount an employee receives after all withholdings have been applied.
Mandatory Deductions
Mandatory deductions are legally required withholdings from gross pay, contributing to various public programs. Federal income tax is a primary mandatory deduction, with the amount withheld based on income, filing status, and Form W-4 elections. This tax provides revenue for federal government operations. Many states and some localities also impose income taxes, similar to federal income tax.
Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes, are mandatory. 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 for employees is 1.45% on all covered wages, with no income limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for individuals, which employers must withhold.
FICA taxes fund Social Security benefits (retirement, disability, survivor) and Medicare health insurance. Employers match these contributions, meaning a total of 12.4% for Social Security and 2.9% for Medicare is paid on an employee’s behalf.
Voluntary Deductions
Employees can authorize voluntary deductions from their pay, often for employer-sponsored benefits. Health insurance premiums (medical, dental, vision) are commonly withheld, representing the employee’s share of benefit costs.
Contributions to retirement plans, such as a 401(k) or 403(b), are common voluntary deductions. For 2025, employees can contribute up to $23,500 to a 401(k) or 403(b) plan. Those aged 50 and over can make an additional catch-up contribution of $7,500, increasing their limit to $31,000. These retirement contributions are generally pre-tax, meaning they reduce an employee’s taxable income, thereby lowering current tax obligations.
Voluntary deductions also include contributions to Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). For 2025, the health FSA contribution limit is $3,300, allowing employees to set aside pre-tax funds for qualified medical expenses. HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for those aged 55 and over. These accounts offer tax advantages for healthcare costs. Deductions for other benefits like life insurance, disability insurance, or commuter benefits can also be voluntary, and some may be post-tax, meaning they are taken after taxes have been calculated.
Understanding Your Pay Statement
A pay statement, often called a pay stub, provides a detailed breakdown of an employee’s earnings and all deductions. Locating key information on this statement is essential to understanding how gross pay translates to net pay. The pay statement clearly itemizes gross pay, which is the total earnings before any subtractions, and net pay, the final amount deposited or paid.
Each mandatory and voluntary deduction is listed separately. This includes amounts withheld for federal income tax, FICA taxes (Social Security and Medicare), and any state or local taxes. Voluntary deductions like health insurance premiums, 401(k) contributions, and FSA or HSA contributions are also detailed. Employees should review these figures to ensure they align with their elected benefit choices and tax withholding preferences, as indicated on forms like the W-4. Many pay statements also include year-to-date (YTD) totals for both earnings and deductions, providing a cumulative view of financial activity throughout the year.