Your Paycheck: The Number That Shrinks on the Way Home
I got my first real paycheck this week, and I read it three times, because the number on it does not match the number they offered me.
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Your Paycheck: The Number That Shrinks on the Way Home
Episode guide
The salary on an offer letter and the money that reaches your bank account are two different numbers, and both of them are yours. The offer letter states gross pay, everything you earned before anything comes out. The paycheck carries net pay, what is left after your employer holds part of it back and sends it to the government in your name. That gap is withholding. 1
What comes out of a check
The first item is federal income tax. How much is withheld depends on how much you are paid and on what you told your employer on Form W-4, the form you complete when you are hired. The Internal Revenue Service notes one limit worth knowing: you cannot simply name a dollar amount for your employer to withhold. The form asks about your situation, and the math follows from your answers. 1
The second item is payroll tax, usually called FICA, and it ignores your W-4 entirely. It funds Social Security and Medicare at rates set by law. For 2026 the Social Security rate is 6.2% of wages, and only up to a ceiling of $184,500; Medicare is 1.45% with no ceiling on earnings. 2
If you live in a state with an income tax, that state withholds its own line on its own rules and its own form.
Why it comes out all year
Federal income tax is described by the IRS as a pay-as-you-go tax: you pay it as you earn it rather than in one sum at the end. Withholding is the collection mechanism, and your employer is the collection point. 1
Because the amount is an estimate, it can miss in both directions. Too little withheld over the year and you may owe the difference when you file, possibly with a penalty. Too much withheld and you did not have that money during the year — you get it back later as a refund. The IRS states the trade-off plainly: a refund is your own money returning to you late, not a bonus. 1
The final amount is settled when you file, because the year's real numbers are only known then. Employers typically send Form W-2 in January, summarizing what you were paid and what was withheld. 3
The part you control
Withholding is not fixed once you are hired. New employees complete Form W-4 so their employer can withhold the correct federal income tax, and a new W-4 can be submitted when your personal or financial situation changes. 3
The IRS recommends checking your withholding every January and after a major life change. Those changes include a new job or other paid work, a major income change, marriage, divorce or separation, a child born or adopted, or buying a home. The Tax Withholding Estimator takes about 25 minutes and needs your most recent pay stubs. It does not ask for your name, Social Security number, address or bank account details, and it can generate a pre-filled W-4 to hand to your employer. 4
One exception to the whole picture: if you are paid as an independent contractor rather than an employee, no employer withholds for you. You pay the tax yourself, and you may need to make payments during the year instead of one amount at filing time. 3
This episode is educational only and is not registered tax or investment advice. It explains how the system works and does not tell anyone what to enter on their own form, because that depends on their situation.
References
- 1IRS: Tax withholding
irs.gov
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