Gross pay, net pay and the gap between them

Gross pay is everything you earned in a pay period before anything is removed. Net pay, sometimes printed as take-home pay, is the number that actually arrives in your bank account. The gap between them is a stack of deductions, and the point of reading a pay stub is to know what every one of them is.

Take Marisol’s stub. She works 30 hours a week at $18.00 an hour and is paid every two weeks, so her gross pay is 60 × $18.00 = $1,080.00. Her deposit is about $929. Nothing has gone wrong. Roughly 14 cents of every dollar she earned went somewhere before the money reached her, and each destination has a name and a legal basis.

Every budget in this course begins at net pay, because net pay is the only money you can actually spend. A worker who plans around gross pay overstates their income by 10–25%, which is enough to break a rent decision.

The deductions required by law

Four deductions appear on nearly every California paycheck. The first two are payroll taxes created by the Federal Insurance Contributions Act and are collectively called FICA.

Two details are worth memorizing. First, your employer pays a matching 6.2% and 1.45% out of its own money, so 12.4% of your wages goes to Social Security and 2.9% to Medicare in total; only half shows on your stub. Second, FICA and SDI are flat percentages of wages with no standard deduction, so they apply from the very first dollar you earn. Social Security has an annual wage ceiling (the SSA sets it each year; it was $176,100 of wages in 2025), which almost no first job reaches. California removed the wage ceiling on SDI, so SDI applies to all wages at whatever rate the EDD sets for the year.

Answering a check you will meet: the deduction that funds Paid Family Leave is SDI, not Medicare and not Social Security. SDI is a California program run by the Employment Development Department, and the same withholding funds both short-term disability benefits and Paid Family Leave.

The deductions you choose

Health insurance premiums, retirement contributions such as a 401(k), flexible spending accounts and union dues come out only if they apply to you. Sorting deductions into required and chosen is a habit worth practicing: Medicare, SDI and income tax withholding are required; a 401(k) contribution, union dues and a health premium are chosen or job-specific.

A retirement contribution is not lost money. If a stub shows a 3% 401(k) contribution on $1,320 gross — $39.60 — that $39.60 is still yours; it has simply been saved before you saw it. That is why a stub with a retirement line can show a smaller net pay and a larger total wealth at the same time.

Why withholding is only an estimate

Your employer does not know what your whole year will look like: whether you will take a second job, quit in March, or be claimed as a dependent. Withholding is therefore a prediction, calculated from IRS and EDD tables using your pay period and the choices you made on Form W-4 and California’s Form DE 4.

At the end of the year your tax return settles the difference. If too much was withheld you receive a refund; if too little, you owe a balance. This is the source of the most persistent myth in personal finance. A refund is not a bonus and is not extra money from the government. It is your own over-withheld wages, returned to you months later without interest. A worker who had $55 withheld from each of 26 paychecks ($1,430) and owed $610 for the year receives $820 back — about $68 a month she could have had all along. A very large refund is a signal to re-check the W-4, not a prize.

The stub is a legal document

California Labor Code section 226 requires an itemized wage statement with every payment. It must show gross wages earned, total hours worked for hourly employees, the number of piece-rate units if any, all deductions, net wages, the dates of the pay period, your name and an employee identifier, the employer’s legal name and address, and all applicable hourly rates with the hours worked at each rate. Available paid sick leave must also appear on the statement or in a separate writing given on payday.

That list is the checklist for the annotation exercise. Compare a stub against it item by item; if a required item is missing, the employer owes you a statement you can actually check. This matters in practice: if Luis’s timesheet shows 62 hours at $19 but his stub shows 58, he is missing 4 × $19 = $76.00 of gross pay, worth about $76.00 × (1 − 0.0885) = $69.27 after FICA and SDI. Only the itemized statement makes that error visible.

Two California facts and one habit

California sets its own minimum wage and adjusts it each January; many cities and counties set a higher local minimum, and the higher figure applies. The Department of Industrial Relations publishes the current state and local rates — always check the date on any figure, because it changes annually.

The habit the lesson is really building is small: read the stub every time. Check the hours. Check the rate. Check that the deductions look like last time. Payroll errors are common, and the person who catches them is almost always the worker.