In more detail
Deductions fall into two groups. Taxes: income tax withheld and payroll taxes such as Social Security and Medicare (7.65% together for US employees, with the Social Security part applying only up to a yearly wage cap). Voluntary or benefit deductions: health insurance, retirement contributions and similar. Some deductions are pre-tax: a traditional 401(k) contribution, for example, lowers the income subject to income tax but not to Social Security and Medicare. Compare job offers on gross pay plus benefits, but budget with net pay. See How Paychecks and Taxes Work.
Why it matters
A raise, a new benefit or a change in withholding shows up in net pay, not in the salary figure, and budgeting from gross pay overstates what you can spend by a fifth or more.
Example
A biweekly gross paycheck of $2,500 (illustrative US figures):
| Line | Amount |
|---|---|
| Gross pay | $2,500.00 |
| Social Security + Medicare (7.65%) | −$191.25 |
| 401(k) contribution (5%) | −$125.00 |
| Health insurance | −$80.00 |
| Federal income tax withheld | −$180.00 |
| Net pay | $1,923.75 |