The first paycheck at a new job almost always lands smaller than expected. You agreed to a number, but the deposit is noticeably less. The difference isn’t a mistake — it’s the gap between gross pay, what you earn before anything is removed, and net pay, the take-home amount after a stack of deductions. Learning to read a pay stub turns that gap from a mystery into a map.
Every deduction on the stub falls into one of a few buckets: income tax withholding, mandatory payroll contributions, and voluntary deductions you chose. Once you can name each line, you can see exactly where your money goes on its way from the employer to your bank.
Income tax withholding
The largest bite is usually income tax, withheld from each paycheck as an estimate of what you’ll owe for the year. In the U.S. that means federal income tax and, in most places, state income tax; the amount is based on the details you gave on your Form W-4. In Canada the equivalent is federal and provincial income tax withheld under the TD1 forms you complete.
Withholding is a running prepayment, not a final bill. If too much is taken across the year you get a refund; if too little, you owe the difference at tax time. A large refund isn’t a bonus — it means you lent the government money at no interest all year.
A tax refund feels like a windfall, but it’s really your own money coming back. The goal is to get the withholding close, not to over-withhold and wait a year to reclaim it.
FICA and CPP/EI: the mandatory payroll piece
Separate from income tax are payroll contributions that fund social programs. In the U.S. these are grouped as FICA: Social Security and Medicare. Employees pay 6.2% of wages toward Social Security (up to an annual wage cap) and 1.45% toward Medicare, and the employer matches each — which is why the self-employed, who have no employer, owe both halves.
Canada’s counterparts are the Canada Pension Plan (CPP) and Employment Insurance (EI), each deducted at its own rate up to an annual maximum, with the employer also contributing. Whatever the label, these are not optional and don’t depend on your W-4 or TD1 choices — they’re a fixed percentage of eligible pay.
Pre-tax deductions that shrink the taxable number
Some deductions come out before income tax is calculated, which lowers the income you’re taxed on. The common ones:
- Retirement contributions. A traditional 401(k) in the U.S. or an RRSP contribution in Canada reduces current taxable income while building your nest egg.
- Health-related premiums. Employer health, dental, or vision premiums are often deducted pre-tax, as are contributions to accounts like an HSA.
Because these come out first, a dollar contributed pre-tax costs you less than a dollar of take-home pay — the tax you would have paid on it stays with you. That’s the quiet efficiency of pre-tax saving.
Reading the stub from top to bottom
Most pay stubs follow the same order. Start at gross pay, then subtract pre-tax deductions to reach taxable wages, apply income tax withholding and payroll contributions, remove any after-tax deductions, and what remains is net pay. Two columns usually appear: the current period and the year-to-date running total.
- Check that your gross pay matches your agreed rate and hours before anything else.
- Confirm the retirement and benefit deductions are the amounts you elected.
- Watch the year-to-date tax figures, so a refund or a bill at year-end doesn’t surprise you.
None of these lines is hidden or unfair — they’re just unfamiliar until someone walks you through them. Once you can, the number that lands in your account stops being a surprise and starts being something you can plan around.