Understanding Every Line on Your Pay Stub

Most employees glance at the net pay and ignore the rest of their pay stub. The deductions between gross and net represent 25 to 40 percent of your compensation and understanding them is essential for financial planning. Gross to net breakdown For a $5,000 semi-monthly gross pay ($120,000/year): Gross pay: $5,000.00 Federal deductions: Federal income tax: -$770.00 (varies by W-4) Social Security (6.2%): -$310.00 Medicare (1.45%): -$72.50 State deductions: State income tax: -$250.00 (varies by state) State disability: -$50.00 (some states) Pre-tax deductions: 401(k) (6%): -$300.00 Health insurance: -$200.00 HSA contribution: -$125.00 Dental/Vision: -$25.00 Net pay: $2,897.50 That is a 42% reduction from gross to net. Understanding each line helps you optimize. Pre-tax vs. post-tax deductions Pre-tax deductions (401k, health insurance, HSA) reduce your taxable income. A $300 pre-tax 401k contribution saves you about $75 in taxes (at a 25% marginal rate), so the effective cost is $225 out