When you see your salary on paper, it looks straightforward. But once taxes and deductions are taken out, your actual paycheck is smaller. Social Security, Medicare, federal withholding, state tax, retirement contributions, and health insurance all shape your take-home pay. Understanding each step helps you budget better and plan ahead.
Step 1 — Start with Gross Pay
- Salary workers: Divide your annual salary by the number of pay periods (monthly, bi-weekly, etc.).
- Hourly workers: Multiply your hourly wage by hours worked, including overtime or bonuses.
👉 Example: If you’re in California, you can run the numbers with the California paycheck estimator.
Step 2 — Adjust for Withholding Allowances
Your W-4 form controls how much federal income tax is withheld.
- Before 2020, you claimed “allowances.”
- Now, you enter dependents and adjustments, which act in a similar way.
More allowances (or dependents) usually mean less tax withheld, giving you a larger paycheck but possibly a smaller refund.
Step 3 — Subtract Pre-Tax Deductions
These deductions lower your taxable wages before federal and state taxes:
- 401(k) or 403(b) retirement contributions
- Health, dental, or vision premiums
- HSA or FSA contributions
Tip: Increasing pre-tax contributions reduces taxable income and may lower your paycheck taxes.
Step 4 — Apply FICA (Social Security & Medicare)
- Social Security tax: 6.2% of wages up to $176,100 in 2025
- Medicare tax: 1.45% of all wages
- Additional Medicare tax: 0.9% if income exceeds $200,000 (single) or $250,000 (married filing jointly)
Step 5 — Estimate Federal Income Tax
- Start with taxable wages after pre-tax deductions.
- Subtract the 2025 standard deduction ($15,000 for single, $30,000 for married).
- Apply IRS tax brackets for your filing status.
- Spread the annual tax across your pay periods.
If you’d like to check updated federal changes, see the 2025 withholding updates.
Step 6 — Add State and Local Taxes
Not all states tax wages.
- No tax states: Texas, Florida, Alaska, Washington.
- High-tax states: California, New York.
- Cities with local tax: New York City, Philadelphia.
For example, if you’re paid in New York City, you can try the NYC bi-weekly paycheck tool.
Step 7 — Subtract Post-Tax Deductions
After taxes, your employer may still withhold:
- Roth 401(k) contributions
- Union dues
- Wage garnishments
- Charitable donations
Step 8 — Arrive at Net (Take-Home) Pay
Formula recap:Net Pay = Gross Pay
– Allowance Adjustments
– Pre-Tax Deductions
– FICA Taxes
– Federal Withholding
– State/Local Taxes
– Post-Tax Deductions
Example: Estimating a Paycheck with Allowances
- Gross bi-weekly pay: $3,000
- 5% 401(k): –$150
- Adjusted taxable wages: $2,850
- FICA (SS + Medicare): –$229
- Federal withholding (2 allowances): –$210
- State tax (CA example): –$150
Net paycheck ≈ $2,261
If you had claimed 0 allowances, your federal withholding would be higher, reducing your paycheck.
FAQs
What are paycheck allowances?
Allowances (or W-4 adjustments) reduce how much tax your employer withholds.
Do allowances affect state taxes?
Yes, many states mirror federal withholding choices.
Can I change my allowances?
Yes—submit a new W-4 anytime if your life situation changes.
What’s the quickest way to estimate my paycheck?
Use a dedicated tool. For example, the California take-home calculator or the NYC paycheck estimator.
Bettye is the creator of CityPaycheckCalculator.com, a resource designed to help individuals quickly and accurately estimate their take-home pay across U.S. cities. With a strong focus on clarity, accuracy, and user experience, Bettye provides reliable paycheck calculators and helpful insights to support smarter financial decisions. Her mission is to make complex payroll and tax information simple and accessible for everyone.