While gross wages are typically what an individual refers to when defining personal income, take-home pay determines how much money an employee has to spend from one paycheck to the next. From the employer’s perspective, take-home pay refers to the money paid directly to employees, and gross pay is the total amount of money that must be paid to cover labor expenses.

Because take-home pay is a determined by subtracting deductions from gross pay, it’s helpful to understand the different types of deductions. Standard deductions include:

• Federal income tax
• Social Security taxes, referred to as FICA-OASDI (Federal Insurance Contributions Act – Old-Age, Survivors and Disability Insurance)
• Medicare taxes, also known as FICA-HI (Hospital Insurance)
• State and local income taxes

Depending on the type of benefits an employer may offer and an employee elects, additional deductions taken from a paycheck and impacting take-home pay can include:

• 401(k) or other retirement contributions
• Premiums for medical, dental or life insurance
• Contributions to flexible spending accounts or health savings accounts
• Any other obligation that may be deducted from an employee’s earnings (e.g., an employee’s portion of costs for a work-sponsored mobile phone plan)

Regardless of the number of deductions, federal taxes typically consume the largest portion of deductions. To help determine exactly how much federal income tax will be withheld from each paycheck, new employees should complete an IRS Form W-4 for their employer. Employers can also refer to Publication 15, (Circular E), Employer’s Tax Guide, which outlines their responsibilities for filing and reporting tax information. This guide also includes tables that outline federal income tax withholding thresholds.

When considering the overall salary or pay rate for a job, it is important for employees to remember—and employers to remind—that total compensation includes more than just the money an employee takes home at the end of a pay period.  Many of the benefits that appear as deductions on a paycheck, including health insurance and the opportunity to contribute to a retirement account, are part of the total payment package.