Payroll deductions

From Bogleheads

Many deductions come from your gross salary or wages to determine the amount on your paycheck. Payroll deductions summarizes the most common of these deductions, and shows which deductions lead to intermediate results such as Social Security and Medicare (FICA) wages and IRS Form W-2 Box 1.

References to a 401(k) include 403(b) and 457(b) plans, and the federal Thrift Savings Plan.

Gross pay

Start with:

  1. Gross Pay: The total amount of remuneration before removing taxes and other deductions.[1]
- Pretax Health/Dental/Vision insurance
- Healthcare Flexible Spending Account (FSA)
- Dependent Care FSA
- Employer-sponsored Health Savings Account (HSA)

See Fringe Benefit Exclusion Rules for other deductions that reduce FICA wages, including

- Pretax Commuter costs

FICA salary/wages

Subtracting all the above from gross pay gives your

  1. FICA salary/wages: The amount on which your Social Security and Medicare taxes are based. This amount appears in Form W-2 box 5. The amount subject to Social Security taxes, which is the same value except capped at the Social Security Wage Base ($160,200 in 2023), appears in box 3.

From there, subtract traditional Elective Deferrals and any mandatory pre-tax pension contributions

- 401(k)
- Pre-tax pension contribution

W-2 box 1 amount

Those subtractions from FICA pay give your

  1. W-2 box 1 amount

W-2 box 1 is what goes on the Form 1040 line for "Wages, salaries, tips, etc." At the end of the year, the per-paycheck total may be increased by the amount of taxable employer-paid Group-Term Life Insurance and any FICA tax on that amount will be payable with the annual tax return.

You may have elected to make various contributions that do not reduce the W-2 box 1 amount, but do reduce your paycheck amount. These include

- Roth 401k
- Employee Stock Purchase Plan
- After-tax 401k
- After-tax pension contribution

Net before tax and withholding

Subtracting those amounts gives your

  1. Net before tax and withholding

The final group of subtractions are the FICA taxes, and withholding amounts based on the Form W-4 you have given to your employer.

Withholding for Supplemental Wages (bonuses, overtime pay, taxable fringe benefits, and so on) often ignores the W-4 and uses a fixed withholding rate.

- FICA tax
- Federal withholding
- State/city withholding

Amount on the paycheck

Subtracting those amounts gives your

  1. Amount on the paycheck

that you cash (or receive via direct deposit). This is often referred to as net pay or take-home pay.

All the above assumes enough gross pay to cover all deductions, and no interference from government-ordered deductions (for example, garnishment or alimony). When an employee's gross pay is not enough to cover all their deductions, the Order of precedence from gross pay tells employers the order in which to make authorized deductions.

References

  1. "What is Gross Pay?". Corporate Finance Institute. Retrieved October 1, 2023.