Gross to net, line by line

The order payroll works in

• Gross: hours times rate, plus overtime and premiums.
• Pre-tax deductions: traditional 401(k), HSA, and health premiums under a section 125 plan. These come out first and lower the income that gets taxed.
• Federal income tax: from your W-4 and the annual tables.
• Social Security: 6.2% of wages up to the annual wage base.
• Medicare: generally 1.45% of Medicare-taxable wages, with 0.9% Additional Medicare withholding after wages from one employer exceed $200,000 in the year.
• State and local income tax where they apply.
• Post-tax deductions: Roth contributions, union dues, garnishments.
• Net: the amount remaining after the deductions shown on that payslip.

The detail people miss

Traditional pre-tax retirement contributions can lower income-taxable wages without necessarily lowering Social Security and Medicare wages. Qualifying section 125 health premiums may reduce all three wage bases, depending on the plan and payroll treatment.

Social Security withholding generally stops after wages from one employer reach the annual base, so later take home pay may increase for some workers. Other deductions and payroll timing can change that pattern.

Checking your own payslip

Multiplying Social Security-taxable wages by 0.062 and Medicare-taxable wages by 0.0145 can provide a rough check below the relevant thresholds. Wage bases, pre-tax benefits, Additional Medicare, rounding and year-to-date limits can all make the payslip lines differ from gross pay times those rates.

Where this comes from

• IRS Publication 15-T, Federal Income Tax Withholding Methods (opens in a new tab)
• IRS Topic no. 751, Social Security and Medicare withholding rates (opens in a new tab)