How to Calculate Taxes on Paycheck: Gross Pay, Deductions, Withholding, and Net Pay

To calculate taxes on a paycheck, you start with gross pay, then subtract federal income tax withholding, FICA taxes, any applicable state and local taxes, and voluntary deductions, to arrive at net pay. Each of these steps follows a specific, predictable formula.

Here’s how to calculate it, step by step.

Step 1: Start with gross pay

Gross pay is total earnings before anything is withheld. For hourly employees, that’s hours worked multiplied by the hourly rate, plus any overtime. For salaried employees, it’s the annual salary divided by the number of pay periods in the year.

Example: An hourly employee working 80 hours in a biweekly pay period at $25/hour earns $2,000 in gross pay.

Step 2: Subtract federal income tax withholding

Federal income tax withholding is based on the employee’s Form W-4, which accounts for filing status, dependents, and any additional withholding requested. The IRS provides withholding tables and a Publication 15-T method that employers use to calculate the exact amount to withhold for each pay period, based on gross wages and W-4 elections.

There’s no flat percentage here. Two employees earning identical gross pay can have different federal withholding amounts based purely on how they filled out their W-4.

Step 3: Subtract FICA taxes

FICA is the one part of this calculation that’s genuinely predictable, since the rates are fixed by law:

Example: On $2,000 in gross pay, Social Security withholding is $2,000 × 6.2% = $124, and Medicare withholding is $2,000 × 1.45% = $29, for a combined FICA deduction of $153.

Step 4: Subtract state and local taxes, if applicable

Not every state has an income tax. In states that do, the calculation typically follows a similar withholding-table method to federal tax, based on the employee’s state withholding form and gross wages. Some cities and counties also levy local income taxes, which stack on top of state withholding.

Step 5: Subtract voluntary deductions

These vary by employee and employer, but commonly include:

• Health insurance premiums

• Retirement contributions, such as a 401(k)

• Health savings account (HSA) or flexible spending account (FSA) contributions

Many of these deductions are pre-tax, meaning they reduce the wages subject to federal income tax and, in some cases, FICA, before those taxes are calculated. This is why the order of calculations matters: pre-tax deductions typically apply before, not after, tax withholding is computed.

Step 6: Arrive at net pay

Whatever remains after every deduction is the employee’s net pay, the amount that actually gets deposited.

Putting it all together

Using the $2,000 gross pay example, with no state income tax and no pre-tax deductions for simplicity:

The federal income tax figure above is illustrative. The actual amount depends entirely on the employee’s W-4 elections and the IRS withholding tables in effect for the year.

Why manual calculation gets risky

Doing this by hand for one paycheck is manageable. Doing it correctly, every pay period, for every employee, while tracking wage base limits, additional Medicare thresholds, and annual rate updates, is where manual payroll tends to break down. A single miscalculated withholding doesn’t just shortchange the employee’s paycheck, it creates a tax filing discrepancy that surfaces later, often at year-end when W-2s are issued.

The core formula to remember

However complex your specific situation gets, the underlying formula never changes:

Gross pay − federal tax − FICA − state/local tax − voluntary deductions = net pay

Every payroll calculation, no matter how many line items appear on the pay stub, is a variation of that single equation.

The formula is simple until you're running it correctly for every employee, every pay period. PayWow calculates gross pay, withholding, and net pay automatically, so a miscalculated paycheck never becomes a year-end surprise.