Understanding Paychecks: What Gets Taken Out and Why | Teen Finance

You worked 20 hours. At $15 an hour, that's $300.

Then the paycheck arrives: $247.

What happened to the other $53?

This is the moment almost every teen has—staring at a number that's significantly less than what they calculated. Feeling, maybe, a little robbed.

Nobody stole your money. But nobody explained where it went, either.

Let's fix that.

Gross Pay vs. Net Pay: The Numbers That Actually Matter

First, some vocabulary that will make everything else make sense.

Gross pay is what you earned. Hours worked times hourly rate. This is the big number, the one you probably calculated in your head. In our example: $300.

Net pay is what you actually take home. Gross pay minus all the deductions. This is what lands in your bank account. In our example: $247.

The difference—that $53—didn't disappear. It went to specific places for specific reasons. And understanding where helps you make sense of every paycheck you'll ever receive.

Reading a Pay Stub

Your paycheck (or direct deposit notification) should come with a pay stub—a breakdown of how your pay was calculated. It looks like a lot of numbers, but it's actually pretty simple once you know what you're looking at.

The stub typically shows:

• Gross pay (what you earned)

• Each deduction, listed separately

• Net pay (what you're getting)

• Year-to-date totals (how much you've earned and paid so far this year)

Every line item on that stub means something. Let's go through them.

The Mandatory Deductions

These are the things that get taken out of almost every paycheck, by law. You don't have a choice about these—but you should understand what they are.

Federal Income Tax

This is probably the biggest deduction on your stub.

The federal government collects income tax to pay for... basically everything the government does. Roads, military, federal programs, national parks, all of it.

Here's what confuses people: how much gets taken out of each paycheck is an estimate. Your employer guesses how much you'll owe for the whole year and withholds a portion from each check.

At the end of the year, when you file taxes, you figure out whether they took too much or too little. If they took too much, you get a refund. If they took too little, you owe the difference.

For most teens with part-time jobs, the withholding is often too high—which means you'll get some of that money back when you file. More on that in a minute.

How tax brackets actually work

You might have heard that income is taxed at different rates depending on how much you make. This is true, but people misunderstand how it works.

Tax brackets are marginal. That means each rate only applies to the income within that bracket—not all your income.

For 2025, the first $11,925 of income is taxed at 10%. If you make more than that, the next portion is taxed at 12%, and so on.

So if you earn $15,000 in a year:

• The first $11,925 is taxed at 10% = $1,192.50

• The remaining $3,075 is taxed at 12% = $369

• Total federal income tax: about $1,561.50—not 12% of the whole thing.

This matters because people sometimes worry that earning more money will put them in a "higher tax bracket" and somehow cost them money. That's not how it works. A higher bracket only affects the additional income, not everything you've already earned.

The W-4 form

When you started your job, you filled out a W-4. This form tells your employer how much federal income tax to withhold from each paycheck.

For most teens, the W-4 is pretty straightforward. You're single, you're claimed as a dependent by your parents, and you probably don't have complicated deductions to account for.

If you're not sure what you put on the W-4, you can always ask HR for a copy or submit a new one if your situation changes.

Social Security Tax (6.2%)

This one's non-negotiable. Everyone who earns income pays into Social Security.

Social Security is a federal program that provides income to retired people, people with disabilities, and survivors of workers who have died. The idea is that you pay in while you're working, and you receive benefits when you're old enough to retire (or if you become disabled).

At 6.2% of your gross pay, this adds up. On $300, that's $18.60.

Here's the thing: you won't see this money again for decades. But it's not lost—it's going toward a benefit you'll eventually receive.

Medicare Tax (1.45%)

Medicare is the federal health insurance program for people over 65 (and some people with disabilities).

Like Social Security, you pay into Medicare while you're working, and you become eligible for the benefits later.

On $300, Medicare takes about $4.35.

FICA: The Combined Number

You might see "FICA" on your pay stub instead of (or in addition to) Social Security and Medicare listed separately.

FICA stands for Federal Insurance Contributions Act—it's just the legal name for these two taxes combined.

Social Security (6.2%) + Medicare (1.45%) = FICA (7.65%)

On $300, that's $22.95 total.

State Income Tax

This one depends on where you live.

Most states have their own income tax that works similarly to federal income tax—a percentage of your income goes to fund state programs and services.

But some states have no income tax at all: Alaska, Florida, Nevada, New Hampshire (on wages), South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you're in Florida, you won't see this line on your pay stub. If you're in California, it'll be a noticeable chunk.

Check your stub to see what your state takes.

Local Taxes

Some cities and counties also have their own income taxes. Not everywhere, but if you work in a major city, this might apply.

Again, check your stub. If there's a local tax line, that's what it is.

Other Possible Deductions

Beyond the mandatory taxes, there are some other things that might (or might not) appear on your pay stub.

Health Insurance Premiums

If you're enrolled in health insurance through your employer, your share of the premium gets deducted from your paycheck.

For most teens, this doesn't apply—you're probably still on your parents' insurance. But if you're working full-time or your employer offers coverage you've enrolled in, you'll see this here.

Retirement Contributions

Some employers offer 401(k) plans even to part-time workers. If you've enrolled and are contributing, that amount comes out before your net pay.

Most teens don't do this—but honestly, if your employer offers a match and you can afford to contribute even a little, it's free money. Something to consider.

Union Dues

If your workplace is unionized and you've joined the union, dues get deducted from your paycheck.

Uniform or Equipment Costs

Some employers deduct the cost of required uniforms or equipment. This should be disclosed upfront, and there are legal limits on what they can deduct.

Wage Garnishments

If you owe money through a court order (like child support, which obviously doesn't apply to most teens, or certain debts), those can be deducted directly from your paycheck.

For most teens, this section is empty.

What Should NOT Be Deducted

There are some things employers cannot legally take from your paycheck:

• Deductions that bring your pay below minimum wage (for non-exempt employees)

• Cash register shortages (in many states)

• Breakage or customer walkouts (in many states)

• Deductions for things you didn't agree to in writing

If something shows up on your stub that you didn't authorize and don't recognize, ask about it.

Getting Your Money Back

Here's the part teens need to understand: much of what's withheld for federal income tax often comes back.

Why you'll probably get a refund

Remember, withholding is an estimate. Your employer guesses how much you'll owe based on limited information.

For most teens working part-time, the total income for the year is below the standard deduction ($15,750 for single filers in 2025). That means your actual tax owed might be zero—but your employer has been withholding throughout the year as if you owed something.

The difference comes back as a refund when you file your taxes.

The catch: you have to file to get it back

If you don't file a tax return, that withheld money just... stays with the government. They don't automatically send it back.

Even if you're not required to file (because your income was below the threshold), you should file if taxes were withheld—because filing is how you get the refund.

→ What Teens Need to Know About Taxes (Before They File Their First One) Post Feb 18th

What to do with your refund

When that refund hits—and it might be a few hundred dollars if you worked steadily through the year—it can feel like a windfall.

A few options:

• Save some or all of it (future you will thank present you)

• Put it toward something you've been saving for

• Use it to cover something practical you need

What tends to backfire: treating it like "bonus money" that doesn't count. It's not bonus money—it's your money that you earned months ago and are just now receiving. Treat it accordingly.

Making Sense of It All

The first few paychecks feel like a lot to process. All these numbers, all these deductions, money going places you didn't expect.

Here's what I want you to take from this:

The gap between gross and net is permanent. You will never take home 100% of what you earn. That's how the system works. Budget based on net pay, not gross.

Understanding the deductions helps it feel less random. When you know where the money's going—taxes that fund services, Social Security you'll use later, maybe insurance you've chosen—it makes more sense than just "the government took it."

You have some control. The W-4 affects your withholding. Your choices about benefits affect other deductions. Understanding the system helps you make informed decisions.

Your pay stub tells a story. Every paycheck, take 30 seconds to look at the stub. Make sure the hours are right. Make sure the deductions look normal. Catch errors early.

This is basic financial literacy. And now you have it.

For Parents: Making This Concrete

If your teen just got their first paycheck and is feeling the shock of deductions, this is a teaching moment.

Sit down with the actual stub. Don't explain in theory—look at their real numbers together. Calculate the percentages. Show them where each dollar went.

Explain the refund reality. Help them understand that some of this money will come back. That changes how the deductions feel—from "theft" to "temporary loan to the government."

Connect it to the bigger picture. Social Security exists because of this. Roads get built because of this. It's easy to resent the deductions, but they fund real things.

Model this yourself. Let them see your pay stub if you're comfortable with it. Show them that this never goes away—but that you've learned to work with it.

The Bottom Line

Your paycheck is smaller than your gross pay. That's true for your first job and every job after.

The money isn't disappearing. It's going to specific places: federal taxes, state taxes (maybe), Social Security, Medicare. Most of it you'll benefit from eventually—either as services now, a refund soon, or benefits decades from now.

Understanding the gap between gross and net is the first step toward real financial literacy. You're not getting less than you earned. You're learning how earnings actually work.

Welcome to adulthood. The math is annoying, but at least now you know what you're looking at.

Related Posts

The "Just Get a Job" Problem: What First Employment Really Requires
What Teens Need to Know About Taxes (Before They File Their First One) → Post Feb 2/18

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