Understanding Your Paycheck (Without the Headache) Part III of IV: What Deductions Actually Mean

Almost any paycheck will show a list of deductions.

Some are required, some depend on your benefits, and some may seem like a mystery: did you even sign up for them?

Let’s walk through the most common ones, as nothing on your paystub should catch you off guard.

1️⃣ Federal Income Tax

This is the main tax collected by the federal government. It helps fund national defense, infrastructure, federal programs, and education.

The amount withheld depends on your W-4 form and how much you earned that pay period. As we covered in Part II, bigger checks can mean more withheld, but the final calculation takes place when you file your return.

2️⃣ Social Security (OASDI)

You might see this listed as OASDI on your stub. That stands for Old Age, Survivors, and Disability Insurance.

This funds Social Security retirement benefits and disability programs. Workers contribute 6.2% of wages, up to a yearly wage cap. Your employer matches that 6.2%: it doesn’t come from your pay.

3️⃣ Medicare

Medicare taxes fund healthcare for Americans aged 65 and older. Workers contribute 1.45% of wages, and again, your employer matches it.

One thing worth knowing: if you earn over $200,000 in a year, an additional 0.9% Medicare surtax kicks in. Most hourly workers won’t hit that threshold, but it’s good to know that it exists.

4️⃣ State and Local Taxes

Depending on where you live and work, your stub may show:

• State income tax
• City or county tax
• Local school district tax

Not every state has income tax, but many do. Some cities also add their own additional tax on top of the state tax. If you work in a different city or state than you live in, you may see taxes for both.

5️⃣ Benefits Deductions

If you’re enrolled in employer benefits, you’ll likely see deductions for some combination of:

• Health insurance
• Dental insurance
• Vision insurance
• Life insurance

Here’s the part that works in your favor: most of these are pre-tax deductions, meaning they lower the amount of income that is taxed. So enrolling in benefits doesn’t just give you coverage: it can slightly reduce your tax bill, too.

6️⃣ Retirement Contributions

If you contribute to a 401(k) or similar retirement plan, you’ll see that deduction listed separately. This money goes straight into your retirement savings (not to taxes).

Pre-tax 401(k) contributions also reduce your taxable income, similar to pre-tax benefits. And if your employer offers a match, that’s additional money going into your retirement account that doesn’t come out of your paycheck.

7️⃣ Other Deductions

Depending on your job, you might also see:

• Union dues
• Disability insurance
• Garnishments (court-ordered deductions)
• Uniforms or tools

A reminder from Part I: if your employer deducts for protective equipment, uniforms, or tools, federal law requires your take-home pay to stay at or above minimum wage. Some states have even stricter protections. If a deduction looks wrong or wasn’t explained to you, your HR or payroll department is required to clarify it, so don’t hesitate to ask.

Quick Tip

Your pay stub is a record, not just a receipt. Save it. If a deduction changes, appears unexpectedly, or disappears when it shouldn’t, you’ll want that paper trail. Most payroll apps let you download stubs. It helps to make downloading stubs a habit and to file them in order of receipt so you can reference them later if any questions arise. 

Coming Up in Part IV

We’ll discuss overtime myths, paycheck red flags, and other items that hourly workers should review.​

Please note: this is general information only and is not tax or legal advice. Please consult an accountant or financial professional for information specific to you and your needs.