Formulas & Methodology
Gross to Net Pay
Net Pay = Gross − Federal Tax − State Tax − FICA − Pre-Tax Deductions The sequential deduction process that determines your actual take-home pay from your gross salary.
FICA Calculation
FICA = (Gross × 6.2% SS) + (Gross × 1.45% Medicare) Social Security is capped at $176,100 (2025). Medicare has no cap, with an additional 0.9% surtax above $200K.
Effective Tax Rate
Effective Rate = Total Tax Paid ÷ Gross Income × 100 Your actual average tax percentage across all brackets, always lower than your marginal rate.
Hourly ↔ Annual Conversion
Annual = Hourly × Hours/Week × Weeks/Year Standard: 40 hrs/wk × 52 weeks = 2,080 hours/year. Overtime calculated separately at 1.5× or 2.0× rate.
Key Terms
- Gross Pay
- Your total earnings before any taxes or deductions are withheld. Includes base salary, overtime, and bonuses.
- Net Pay (Take-Home)
- The actual amount deposited into your bank account after all federal, state, and FICA taxes plus pre-tax deductions.
- Marginal Tax Rate
- The tax bracket applied to your highest dollar of income. Not the rate applied to all your income — only the last portion.
- Effective Tax Rate
- Your actual average tax rate: total taxes divided by gross income. Always lower than your marginal rate due to progressive brackets.
- FICA
- Federal Insurance Contributions Act taxes: 6.2% for Social Security (capped) and 1.45% for Medicare (uncapped). Your employer matches these amounts.
- Pre-Tax Deductions
- Contributions deducted before taxes are calculated (401k, health insurance, HSA). These reduce your taxable income, lowering your tax bill.
Worked Examples
Standard Employee — $75,000/yr
Setup: Single filer, California, 6% 401(k), $150/mo health insurance.
Pre-tax deductions: $4,500/yr (401k) + $1,800/yr (health) = $6,300. Taxable income: $68,700.
Federal tax: ~$8,700. State tax: ~$2,900. FICA: ~$5,738. Net pay: ~$51,362/yr or ~$1,976/bi-weekly.
Hourly Worker with Overtime
Setup: $25/hr, 40 hrs/wk + 10 hrs OT at 1.5×, Texas (no state tax), single.
Base: $52,000/yr. OT: $25 × 1.5 × 10 × 52 = $19,500. Gross: $71,500.
Net pay: ~$56,100/yr. No state tax saves ~$3,000+ compared to a California equivalent.
Goal Seeker — Target $5,000/mo Net
Setup: Married, New York, 3% 401(k).
Target: $5,000/mo take-home = $60,000/yr net.
Result: Need approximately $88,000 gross annual (~$42.30/hr at 40 hrs/wk) to achieve $5,000/mo after taxes.
State Tax Comparison
| State | Income Tax Rate | $75K Net Pay | $100K Net Pay | Annual Savings vs CA |
|---|---|---|---|---|
| Texas (No Tax) | 0% | ~$57,800 | ~$75,200 | +$3,100 - $4,500 |
| Florida (No Tax) | 0% | ~$57,800 | ~$75,200 | +$3,100 - $4,500 |
| Colorado | 4.4% flat | ~$54,500 | ~$70,800 | +$200 - $500 |
| New York | 4-10.9% | ~$53,200 | ~$68,900 | −$1,100 - $1,800 |
| California | 1-13.3% | ~$54,700 | ~$70,700 | Baseline |
Understanding Your Paycheck
How Progressive Tax Brackets Work
The US federal income tax system uses progressive brackets, meaning different portions of your income are taxed at different rates. Only the income within each bracket is taxed at that bracket's rate. For example, a single filer earning $75,000 in 2025 pays 10% on the first $11,925, 12% on income up to $48,475, and 22% on the remainder. This is why your effective rate is always lower than your marginal rate.
The Hidden Impact of Pre-Tax Deductions
Pre-tax deductions like 401(k) contributions, health insurance premiums, and HSA contributions are among the most powerful tools for reducing your tax bill. A 6% 401(k) contribution on a $75,000 salary redirects $4,500 from your taxable income, potentially saving $990–$1,080 in federal taxes alone (at the 22% bracket).
FICA: The Tax Everyone Pays
Unlike income tax, which has brackets and deductions, FICA taxes are flat and nearly universal. Every dollar you earn up to $176,100 (2025) is subject to 6.2% Social Security tax, and all earnings face the 1.45% Medicare tax. High earners above $200,000 pay an additional 0.9% Medicare surtax. FICA represents 7.65% of your income — knowing this helps set realistic take-home expectations.
State Tax: The Geographic Advantage
Where you live can significantly affect your paycheck. Nine states have no income tax at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), while states like California and New York can take an additional 5–13% of your income. For a $100,000 salary, the difference between Texas and California amounts to roughly $4,000–5,000 per year.