Every time you receive a paycheck, the amount of money you take home is less than the amount you actually earned. Pay is less than earnings because employers make various deductions from your gross income to cover a range of taxes and -- in some cases -- to help fund other benefits. Understanding common paycheck deductions can help you make sense of your pay stub.
Employees pay federal and state income taxes automatically through tax withholding. Your employer takes money out of each paycheck and sends it to the Internal Revenue Service and your state's department of taxation on your behalf. By contrast, self-employed workers, such as contractors and owners of small businesses, must make quarterly tax payments.
Social Security and Medicare
Social Security and Medicare are government programs that provide financial security for retirees. Both programs are funded by federal taxes that come out of earned income. Like income taxes, they are deducted from gross income. According to the U.S. Social Security Administration, as of 2012 the Social Security tax rate is 4.2 percent and the Medicare tax rate is 1.45 percent.
Medical and Dental Expenses
Many employers offer dental and medical plans that let employees pay for insurance premiums and other costs on a pre-tax basis. If you pay for medical and dental insurance premiums on a pre-tax basis, employers deduct those costs from your paycheck. If you have a flexible spending account that lets you set aside money for medical expenses on a pre-tax basis, your contributions come out of your paycheck.
Retirement Plan Contributions
Saving for retirement is essential to ensure that you have the money to do what you want when you retire, but it can also shrink your paycheck. Many employers offer tax-deferred retirement accounts, such as a 401(k) plan, that let you contribute funds on a pre-tax basis. Money you save in a 401(k) plan or other pre-tax account shows up as a deduction on your paycheck.
Labor unions are organizations that represent workers and help them negotiate with employers for better working conditions, pay and benefits. Unions typically charge workers monthly membership fees called "dues" to fund their operations. If you are a union member, initiation fees and monthly dues may come directly out of your paycheck.