How Is Take-Home Pay Calculated?
Your take-home pay starts with your gross salary — the number on your offer letter — and then subtracts a series of mandatory and voluntary deductions before hitting your bank account. The calculation happens in a specific order that matters for minimising your tax bill.
- Pre-tax deductions first — Traditional 401(k) contributions, health insurance premiums paid through your employer, HSA contributions, and FSA contributions are subtracted from gross pay before federal income tax is applied. This is the most valuable step because every dollar moved here saves you money at your marginal tax rate.
- Federal taxable income — From the reduced gross, subtract the standard deduction (or itemised deductions if larger). What remains is your taxable income, the figure the IRS actually taxes.
- Apply the tax brackets — The US uses a progressive (marginal) tax system. Each bracket's rate only applies to income within that range, not your whole salary. Add up the tax owed across each bracket to get your total federal income tax.
- FICA taxes — Social Security (6.2%) and Medicare (1.45%) are applied to gross wages, not taxable income, and calculated separately. They are not reduced by the standard deduction or 401(k) contributions.
- The result — Gross – 401(k) – Health Insurance – Other Pre-Tax – Federal Income Tax – Social Security – Medicare = Net Take-Home Pay.
Standard Deduction 2026
The standard deduction is an automatic reduction to your gross income that shrinks your federal taxable income without requiring you to track individual expenses. Congress adjusts it each year for inflation. For the 2026 tax year, the IRS has set the following amounts:
| Filing Status | 2026 Standard Deduction | vs 2025 |
|---|---|---|
| Single | $15,000 | +$400 |
| Married Filing Jointly | $30,000 | +$800 |
| Married Filing Separately | $15,000 | +$400 |
| Head of Household | $22,500 | +$600 |
Most taxpayers take the standard deduction because it exceeds the sum of their itemisable expenses (mortgage interest, charitable gifts, state and local taxes, etc.). If your itemisable deductions exceed the standard deduction — common for high-earners with large mortgages — you should itemise instead. The calculator uses the standard deduction.
Social Security and Medicare (FICA)
FICA (Federal Insurance Contributions Act) taxes fund Social Security retirement and disability benefits and Medicare health coverage. Unlike federal income tax, FICA is not progressive — it applies as a flat percentage from dollar one, and it is calculated on gross wages before pre-tax deductions.
| Tax | Employee Rate | Wage Cap (2026) |
|---|---|---|
| Social Security (OASDI) | 6.2% | $176,100 |
| Medicare (HI) | 1.45% | No limit |
| Additional Medicare Tax | 0.9% | On wages >$200K (single) |
Your employer matches your Social Security and Medicare contributions dollar-for-dollar (another 7.65% they pay on your behalf), meaning the true cost of employing you includes FICA on both sides. Self-employed individuals pay the combined 15.3% as Self-Employment Tax, though they may deduct half of it on their federal return.
Once your wages exceed the Social Security wage base ($176,100 in 2026), the 6.2% stops. High earners effectively see a paycheck increase in the fall once they hit this cap. Medicare has no cap, and an additional 0.9% kicks in above $200,000 for single filers.
How Pre-Tax Contributions Reduce Your Tax Bill
Contributing to a traditional 401(k), HSA, or employer-sponsored health insurance plan reduces your federal taxable income — not just dollar-for-dollar savings, but savings at your marginal tax rate. Here's why that matters:
Say you earn $85,000 and are single. Your marginal federal rate is 22%. If you contribute $6,000 to your 401(k), you save $1,320 in federal income tax ($6,000 × 22%). Additionally, if your state has an income tax, you save at that rate too — potentially making the total tax savings 30–35% of every dollar contributed.
Note the limits for 2026: The 401(k) employee elective deferral limit is $23,500 per year ($31,000 if age 50+, thanks to the $7,500 catch-up contribution). HSA limits are $4,300 for self-only coverage and $8,550 for family coverage.
Health insurance premiums paid through an employer cafeteria plan (Section 125) are also pre-tax for both income tax and FICA — a double benefit that out-of-pocket premiums do not get. This is why employer-sponsored insurance is so valuable even when the plan itself is not the cheapest available.
Gross Pay vs Net Pay: What's the Difference?
Gross pay is your total compensation before any deductions. For a salaried employee earning $75,000/year paid monthly, each paycheck's gross pay is $6,250. This is the figure used to calculate FICA, and it is what appears on your pay stub before the waterfall of deductions.
Net pay — commonly called take-home pay — is what lands in your bank account. The gap between gross and net surprises most people: on a $75,000 salary, a single filer with standard 6% 401(k) and $200/month health insurance typically takes home approximately $53,500–$55,500 per year, or around $4,450–$4,625 per month, depending on other factors.
Step-By-Step Worked Example: $75,000 Single Filer
Let's walk through the exact maths for a single filer earning $75,000 with a 6% 401(k) contribution and $2,400/year health insurance premium:
Worked Example: $120,000 Married Filing Jointly
A couple where one spouse earns $120,000, filing jointly, with 8% 401(k) ($9,600) and $5,000 health insurance (family plan):
Notice how the much larger standard deduction for married filing jointly ($30,000 vs $15,000) dramatically reduces taxable income, dropping this $120,000 earner's effective federal rate to just 7.07%.
