A paycheck worksheet that shows where every dollar of your pay goes

Pop quiz. Without looking at your last pay stub, tell me how much Social Security you paid on it. Now tell me how much your employer paid on your behalf, the part that never appears on your side of the page. Can't do it? You are in very good company. Most working Americans can tell you their hourly rate to the penny and their take-home to the dollar, and cannot explain the gap between the two. The stub sits there with its little abbreviations, FICA, FITW, SS, MED, and we shrug and cash the check.

That is a shame, because the government is not shy about the fact that it takes the money. It simply counts on the fact that nobody does the arithmetic. This post is a worksheet. You are going to do the arithmetic once, on a hypothetical worker, with every number shown, and then you will do it on your own stub. It takes about twenty minutes. I promise that when you are done you will never again nod along when someone says "the average family barely pays any tax." You will know what you pay, what your employer pays on your account, and what it all costs.

A note before we start: every figure below is hypothetical, built to make the method clear. Nothing here is a tax table. Where a real number depends on the year, I tell you where to look it up.

Step one: start with the number on top

Our hypothetical worker, call him Sam, earns $1,000 in gross pay for one pay period. Pick any period you like, weekly, biweekly, or monthly; the percentages work the same. Gross pay is what your employer agrees to pay you before anything comes out. It is the number in your offer letter, divided by the number of pay periods.

Line 1: Gross pay = $1,000.00.

Step two: Social Security and Medicare, the simple version

The first two deductions are the payroll taxes under the Federal Insurance Contributions Act, called FICA. They are flat percentages, and the employee's share is the same for nearly everyone.

• Social Security: 6.2 percent. 6.2 percent of $1,000 is $62.00 (0.062 times 1,000).
• Medicare: 1.45 percent. 1.45 percent of $1,000 is $14.50 (0.0145 times 1,000).
• Together: 7.65 percent, or $76.50. ($62.00 plus $14.50.)

Two footnotes. Social Security has a wage base: the 6.2 percent applies only to earnings up to a cap that changes every year, and the Social Security Administration publishes the current figure at ssa.gov. Medicare has no cap, and high earners owe an additional 0.9 percent Medicare tax on wages above a threshold set in law, which the employer withholds from that point on. You pay the Additional Medicare Tax; your employer does not match it.

Now the part nobody tells you. Your employer owes a matching 7.65 percent. On Sam's $1,000, that is another $76.50, paid to the government on top of his wages. Sam never sees it, but it is a cost of employing him. We will come back to that.

Step three: the pre-tax items

Many paychecks carry deductions that come out before income tax is figured. Two are common, and they behave differently, which surprises people.

1. A health insurance premium paid through the employer's plan. Under section 125 of the tax code, premiums paid through a cafeteria plan generally reduce both your income tax wages and your FICA wages. Say Sam's share of the premium is $40.00.
2. A traditional 401(k) deferral. The money you put in reduces your income tax wages but not your FICA wages. You still owe Social Security and Medicare tax on it. Say Sam puts in 5 percent of gross pay, which is 0.05 times $1,000, or $50.00.

Now recompute the payroll taxes on the right base.

Line 2: Health premium (pre-tax) = $40.00. Line 3: 401(k) deferral = $50.00. Line 4: FICA wages = $1,000.00 minus $40.00 = $960.00. (The 401(k) does not come off this line.) Line 5: Social Security = 0.062 times $960.00 = $59.52. Line 6: Medicare = 0.0145 times $960.00 = $13.92. FICA total = $59.52 plus $13.92 = $73.44, which checks against 7.65 percent of $960 (0.0765 times 960 = $73.44).

Notice that the health premium saved Sam $3.06 in payroll taxes on his side ($76.50 minus $73.44), and saved his employer the same. A small gift from the code, and it's real.

Step four: federal income tax withholding

This is the line that confuses people most, so slow down. Withholding is not your tax bill. It is a prepayment that your employer makes to the Treasury on your behalf, based on a formula, and you settle the true amount when you file your return. For that process, see Walking through Form 1040 from the first line to the refund.

Where does the withholding number come from? Three places.

1. Your Form W-4. You fill it out when you start a job. It tells the employer your filing status, whether you have multiple jobs, how many qualifying children and dependents you have (so that credits can be built in), and any other income, deductions or extra withholding you want. The old "allowances" were removed in the redesigned form that took effect in 2020, so if someone tells you to claim "zero allowances" or "two allowances," they are describing a form that no longer exists.
2. Your income tax wages. For Sam, these are gross pay minus the pre-tax items: $1,000 minus $40 minus $50, which is $910.00 (Line 7).
3. The IRS tables. The IRS publishes the formulas in Publication 15-T, the Federal Income Tax Withholding Methods. Your payroll system annualizes your pay (multiplies it by the number of pay periods), subtracts a standard-deduction-style amount and any W-4 adjustments, applies the bracket table, subtracts credits, and then divides back down to a single paycheck.

I will not quote you a table, because tables change. Instead, to keep our example honest, I'll invent a result. Suppose Sam's annualized calculation produces $3,900 of withholding for the year. He is paid 52 times a year, so each check carries $3,900 divided by 52, which is $75.00 (Line 8). That $75 is a made-up number to show the method. Yours comes from your stub, and you can test it with the IRS's Tax Withholding Estimator on IRS.gov.

State and local income taxes are next. Some states have none, some have flat rates and some have brackets, and some cities add their own. For this worksheet we set Line 9, state and local withholding, to $0.00, and you should add your own.

Step five: take-home pay

Now do the subtraction in order, so that you can check every step.

Check it: $1,000.00 minus $40.00 is $960.00. Minus $50.00 is $910.00. Minus $59.52 is $850.48. Minus $13.92 is $836.56. Minus $75.00 is $761.56.

So of Sam's $1,000, he sees $761.56 in his bank account. Where did the other $238.44 go? Not all of it vanished. $50.00 went into his own 401(k), and $40.00 bought his health coverage. Those are his. The government took $59.52 plus $13.92 plus $75.00, which is $148.44 from his side of the page.

Step six: add the employer's half

Here is what makes the worksheet worth doing. Sam's employer does not pay $1,000 for Sam's labor. It pays more.

• Employer match of FICA: 7.65 percent of Sam's FICA wages of $960 is $73.44 (the same figure as his side, because the rate is the same).
• Employer total cost for this paycheck: $1,000.00 in wages plus $73.44 in the employer's FICA match, which is $1,073.44.

(In the simple case with no pre-tax items, the employer's cost would be $1,000 plus $76.50, or $1,076.50. The method is the same.)

I have left out items that vary by employer and state: federal and state unemployment taxes, workers' compensation insurance, and any employer contribution to the health plan or a 401(k) match. Every one of those makes the real cost higher. A rule of thumb for the first few lines: the job costs the employer noticeably more than the wage.

Now follow the whole $1,073.44.

Add the rows: $761.56 plus $90.00 plus $73.44 plus $73.44 plus $75.00 is $1,073.44. The taxes, both halves of FICA plus withholding, come to $73.44 plus $73.44 plus $75.00, which is $221.88, about 20.7 percent of what it cost to employ him. Sam personally sees $761.56 of it, or about 70.9 percent, and he holds another $90.00 in benefits that are his.

That 20.7 percent is before sales tax, property tax, gas tax or anything you pay when you spend the money. It is not the whole story of what a family pays, and I am not claiming it is. It is the part that comes out before you ever touch it. It is also the part where the question "who pays the employer's half?" gets interesting. Economists generally argue that over time workers bear much of it, because an employer who owes 7.65 percent more for each worker will offer lower wages than he otherwise would. The statute says the employer pays half. The market may say otherwise. For more on that, read why your raise feels smaller than the number your boss pays out.

The other lines on the stub

A real stub has a few more lines than our worksheet, and it helps to know what they are before you start.

• Year-to-date (YTD) columns. These add up everything since January 1. They matter for two reasons: the Social Security cap, which stops the 6.2 percent once your year's wages pass the wage base, and the year-end reconciliation with your W-2.
• Hours and rate. If you are hourly, check the math at the top. Gross pay is hours times rate, with overtime at the premium rate the Fair Labor Standards Act requires for covered, non-exempt workers.
• Imputed income and fringe benefits. Some employer-provided benefits, such as group-term life insurance above a statutory amount, are taxable even though you never receive cash. They appear as additions to taxable wages.
• After-tax deductions. A Roth 401(k) contribution, a union due or a wage garnishment comes out after the tax is figured, so it does not reduce your taxable wages.
• Employer-only taxes. Federal and state unemployment taxes and workers' compensation insurance are paid by the employer and never appear on your side. They are part of the real cost of the job.

At the end of the year your employer reports the totals on Form W-2. Box 1 shows your income tax wages (our Line 7, summed over the year), Box 2 shows federal income tax withheld, and Boxes 3 through 6 show Social Security and Medicare wages and taxes. If Box 1 is lower than your gross pay, that is your pre-tax deductions at work. If Box 3 is higher than Box 1, that is the 401(k) effect we saw above. Put your last stub of the year beside your W-2. The numbers should match. If they do not, ask your payroll office before you file.

A raise, run through the same worksheet

Try it on a raise. Suppose Sam gets $50 more per paycheck. His employer pays $50 plus 7.65 percent, which is $3.825 more (0.0765 times 50), for a cost of $53.825. Sam's side: 7.65 percent of $50 is about $3.83 in FICA, and if his extra income falls in a 12 percent federal bracket, 12 percent of $50 is $6.00 in withholding. That leaves $50.00 minus $3.825 minus $6.00, which is $40.175, or about $40. The employer spent nearly $54 to give Sam about $40. That's what people mean when they say a raise "feels smaller."

Doing it on your own stub

Here is the repeatable version. Get your most recent pay stub and a pencil.

1. Write down gross pay for the period.
2. List every pre-tax item, and mark which ones are health or cafeteria plan items (these reduce FICA wages) and which are retirement deferrals (these do not).
3. Compute FICA wages. Multiply by 6.2 percent and 1.45 percent. Compare with the stub. If they don't match, ask payroll. Remember the Social Security cap if you earn above it.
4. Write down federal withholding, state and local withholding, and anything else.
5. Add everything and subtract from gross. It must equal net pay. If it doesn't, you have missed a line.
6. Multiply FICA by two to see the employer's match, and add it to gross for the true labor cost.
7. Once a year, compare the year-to-date withholding on your last stub with your actual tax on Form 1040. If you are consistently getting a large refund, you have been lending the government money for free; your big tax refund is a loan you made to the government for free explains. If you owe a large amount, adjust your W-4.

If you are self-employed, the worksheet changes: you pay both halves of FICA yourself as self-employment tax, 15.3 percent (12.4 percent Social Security plus 2.9 percent Medicare) on 92.35 percent of net earnings, with a deduction for half of it. Look up the form in the IRS instructions for Schedule SE.

The bottom line

• On Sam's hypothetical $1,000 check, take-home was $761.56, and the true cost to the employer was $1,073.44. The gap is made of taxes, benefits and savings, and every piece is on your stub if you look.
• Social Security (6.2 percent) and Medicare (1.45 percent) are matched dollar for dollar by your employer, so what you see is half of the payroll tax.
• Withholding is a prepayment, not a bill. Check it against your return every year and adjust your W-4 if it is far off.
• Do the worksheet on your own stub tonight. If a line does not add up, ask your payroll office.
• When a politician says he will cut your taxes, ask which line on this worksheet he means. Then check what he voted for on our bills page.