Gross pay, net pay, and a dozen mysterious deductions in between. Here's what every line on your pay stub means — and the errors worth catching.
The big picture: gross to net
Every pay stub tells the same story in the same order: Gross pay → pre-tax deductions → taxes → post-tax deductions → net pay (what hits your bank account). The gap between the first and last number surprises everyone at their first job — and confuses plenty of people at their tenth. Let's decode each section.
Section 1: Gross pay
Your earnings before anything is taken out. For salaried workers it's your annual salary ÷ pay periods. For hourly workers it's hours × rate, plus overtime (typically 1.5× beyond 40 hours/week). Also here: bonuses, commissions, and taxable fringe benefits like a company car. If your gross looks wrong, check hours reported and your pay rate first — most "my paycheck is wrong" mysteries start here.
Section 2: Pre-tax deductions
These come out before income tax is calculated, which lowers your taxable income — the rare win-win of payroll:
- 401(k) / 403(b) contributions: retirement savings, often with an employer match (free money — contribute at least enough to capture the full match).
- Health insurance premiums: your share of medical/dental/vision coverage.
- HSA / FSA contributions: health savings or flexible spending accounts.
- Commuter benefits: pre-tax transit or parking.
Section 3: Taxes — the alphabet soup
- Federal income tax: withheld per your W-4. It's an estimate — too much withheld means a refund (an interest-free loan to the government); too little means a bill in April. Big life changes (marriage, kids, second job) are reasons to update your W-4.
- State (and sometimes local) income tax: varies wildly — several states have none at all.
- Social Security (OASDI): 6.2% of wages up to the annual wage base ($168,600 in recent years). Your employer matches it — the real rate is 12.4%.
- Medicare: 1.45% of all wages (no cap), plus an additional 0.9% on wages above $200,000.
Section 4: Post-tax deductions
Taken from what's left after taxes: Roth 401(k) contributions, disability or life insurance premiums, union dues, charitable giving, wage garnishments. Roth contributions deserve a callout — you pay tax now so withdrawals (including all growth) are tax-free in retirement, the mirror image of traditional 401(k) treatment.
Section 5: Net pay and YTD totals
Net pay is your take-home — the number to budget from, always. The YTD (year-to-date) column running alongside is your friend: it shows cumulative earnings, taxes, and contributions, making it easy to spot when something changed mid-year.
Errors worth catching
- Wrong tax withholding after life changes — the most expensive common error, in either direction.
- Missing 401(k) match — verify the employer contribution appears; "free money" only works if it's actually deposited.
- Duplicate benefit deductions — especially after open enrollment changes.
- PTO balances — most stubs show accrued vacation/sick time; make sure it's accumulating.
Scan your stub for two minutes each payday. It's the highest-paid two minutes of your month.
Decoding the abbreviation soup
Pay stubs love cryptic codes. Common ones:
- OASDI — Old-Age, Survivors, and Disability Insurance: the formal name for Social Security tax.
- FIT / SIT / LIT — Federal / State / Local Income Tax withholding.
- EE / ER — Employee / Employer share (as in "ER 401(k) match").
- YTD — Year-to-date totals.
- PTO / EIB — Paid time off / earned income balances.
- GTL — Group Term Life: employer-provided life insurance; coverage above $50,000 is taxable income to you.
- 125 / Cafeteria plan — the section of tax code that makes your health premiums pre-tax.
When in doubt, your HR portal usually has a glossary — or just ask payroll. They decode these all day.
Your pay stub at tax time
Your final pay stub of the year is the rough draft of your W-2 — compare them in January. Federal wages on the W-2 (Box 1) should roughly match YTD gross minus pre-tax deductions; Social Security wages (Box 3) won't match if you earned over the wage base. Discrepancies worth questioning: missing 401(k) contributions (Box 12, code D), HSA contributions you made, or state wages that don't match where you worked. Catching these in January beats amending a return in April.
Frequently asked questions
What's the difference between gross pay and net pay?
Gross pay is your earnings before any deductions. Net pay (take-home pay) is what's left after pre-tax deductions, taxes, and post-tax deductions — the amount that hits your bank account.
Why is so much taken out for Social Security and Medicare?
Social Security is 6.2% of wages up to the annual wage base and Medicare is 1.45% of all wages — and your employer matches both, so the true cost is double what you see.
Should I adjust my W-4?
Yes, after major life changes: marriage, divorce, kids, a second job, or big freelance income. Too much withholding means an interest-free loan to the government; too little means an April bill.
What are pre-tax deductions and why do they matter?
Deductions like 401(k) contributions and health premiums that come out before income tax is calculated, lowering your taxable income — you pay less tax and save simultaneously.