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Economics & Personal Finance
Reading Your First Paycheck
Gross pay, net pay, FICA, and withholdings
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Your first paycheck is more than a payment for your time. It is a record of how your earnings are calculated, what money is withheld for taxes, and what benefits or savings are taken out before you receive cash. Learning to read it helps you catch errors, plan a budget, and understand why take-home pay is smaller than the wage you expected.
Key Facts
- Gross pay = hours worked x hourly wage, plus any overtime or bonuses.
- Net pay = gross pay - taxes - deductions.
- FICA tax includes Social Security tax and Medicare tax.
- Federal income tax withholding depends on your income, pay frequency, and Form W-4 choices.
- Pre-tax deductions lower taxable income before some taxes are calculated, such as 401(k) contributions or certain health insurance premiums.
- Year-to-date total, or YTD, shows the total amount earned, taxed, or deducted since the start of the calendar year.
Vocabulary
- Gross Pay
- Gross pay is the total amount you earn before taxes and deductions are taken out.
- Net Pay
- Net pay is the amount you actually receive after taxes and deductions are subtracted.
- Withholding
- Withholding is money your employer takes from your paycheck and sends to the government for taxes.
- FICA
- FICA is the payroll tax that funds Social Security and Medicare.
- Year-to-Date
- Year-to-date shows the running total of pay, taxes, or deductions from January 1 through the current paycheck.
Common Mistakes to Avoid
- Confusing gross pay with net pay. Gross pay is what you earned before subtraction, while net pay is the amount you can actually spend or deposit.
- Ignoring year-to-date totals. YTD numbers help you track total earnings and tax payments over time, not just on one paycheck.
- Assuming every deduction is a tax. Some deductions are for benefits or savings, such as health insurance or a 401(k), and may reduce taxable income.
- Not checking hours and pay rate. If your hours, overtime, or hourly wage are entered incorrectly, every tax and deduction based on pay may also be wrong.
Practice Questions
- 1 A teen works 18 hours at 22, FICA is 8, and a pre-tax deduction is $10. What are the gross pay and net pay?
- 2 Your gross pay for one paycheck is 24 is taken out before income tax. Federal income tax is calculated as 10% of taxable income after the 401(k) deduction. How much federal income tax is withheld?
- 3 A paycheck shows gross pay of 235, FICA withholding, federal tax, and a health insurance deduction. Explain why the net pay is lower than the gross pay and identify which items are taxes versus deductions.