Paycheck Explained: Where the Money Actually Goes
Tools like ADP’s paycheck calculator can help you see where your money actually goes before it hits your bank account.
Let’s go through a simple example. Imagine you’re hired at a new job earning $60,000 a year. You (are):
Single
Have no dependents
Paid bi-weekly
Live in a state with no state income tax
Contribute 10% to your retirement account—paying yourself first.
You’re also still covered by your parents’ health insurance, which lowers your payroll deductions.
Gross Versus Take-home Pay
Before deductions, your gross pay per paycheck appears to be about $2,307.69.
Several deductions may apply (based on this specific example):
Federal income tax (about $170): This part of your paycheck funds national programs and services, such as infrastructure, education, defense, and public assistance. The amount you pay depends on your income and the details you provide on your W-4. It is the largest variable deduction on most paychecks.
Social Security tax (about $143): This deduction funds the Social Security system, which provides income to retirees, individuals with disabilities, and surviving family members. While retirement may seem far off, these contributions help establish eligibility for future benefits based on your work history.
Medicare tax (about $33): Medicare taxes fund healthcare for seniors and certain disabled individuals. Unlike Social Security, there’s no income limit—everyone pays this tax on their earnings. Even if you don’t use Medicare now, your contributions help sustain the system for future generations (including your future self).
Retirement contribution (about $230): This is your 10% contribution going straight into your retirement account—money you’re saving for your future.
After these deductions, your take-home pay, the amount that actually lands in your bank account, is what you use to build your budget. In this example, that could mean roughly $3,400 per month in cash flow to cover rent, food, transportation, emergency savings, and everything else.
In Short
Your salary gets a lot of attention, but your take-home pay is what really matters for daily life. Knowing the difference helps you budget effectively, avoid surprises, and make intentional financial choices, like saving or investing.
Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.