Lesson P101.3 · Personal Finance 101: Get Control
Read your paycheck and set your W-4
5-minute read · Figures for tax year 2026
Photo: Jakub Zerdzicki / Pexels, Pexels License
The short answer
Your paycheck is smaller than your pay because taxes and deductions come out first. Gross pay is what you earned. Net pay is what lands in your account. The difference is usually federal and state income tax, Social Security and Medicare, plus anything you signed up for, like a retirement plan. If you get a big refund or a big bill every April, your W-4 needs a look.
One weekly stub, line by line
Example numbers only. They are not a pay guide. Marcus works 50 hours in a July week at $20 an hour.
| Line on Marcus's stub | Amount | What it means |
|---|---|---|
| Regular pay, 40 hours at $20 | $800.00 | Hourly rate times regular hours |
| Overtime, 10 hours at $30 | $300.00 | Time and a half for hours over 40 |
| Gross pay | $1,100.00 | Everything earned before anything comes out |
| Federal income tax withheld | $90.00 | Set by his W-4 |
| Social Security, 6.2% | $68.20 | Taken from all $1,100, overtime included |
| Medicare, 1.45% | $15.95 | Taken from all $1,100, overtime included |
| State income tax withheld | $40.00 | Made-up; it varies by state, and some states have none |
| Total taken out | $214.15 | Taxes withheld this week |
| Net pay | $885.85 | What lands in the bank |
To turn weekly take-home into a monthly number, multiply by 52 and divide by 12. If Marcus took home $885.85 every week of the year, that's about $3,839 a month, not the $3,543 you'd get from four checks, because some months have five Fridays. With seasonal work, count only the weeks you'll actually work.
What comes out, and why
- Federal income tax. Your employer figures it from your pay and the W-4 you filled out. It's an estimate of your year's tax, paid as you go.
- State income tax. Most states have one, and it works the same way. A few have none.
- Social Security and Medicare. You pay 6.2% Social Security on wages up to $184,500 (2026) plus 1.45% Medicare on all wages, and 0.9% more on wages over $200,000. Your employer pays a matching 6.2% and 1.45% on top.
- Pre-tax deductions come out before income tax is figured, so they lower your income tax withholding. A traditional 401(k) is the common one, and it still has Social Security and Medicare taken out.
- After-tax deductions, like a Roth 401(k) or a uniform charge, come out after taxes and don't lower them.
Overtime and the new overtime deduction
Look at Marcus's overtime line. Of the $300, $200 is his regular rate for those 10 hours and $100 is the extra half. Only that $100 premium counts toward the federal overtime deduction for tax years 2025 through 2028.
- Up to $12,500 a year of qualified overtime pay counts, or $25,000 on a joint return. The deduction shrinks above $150,000 of modified AGI ($300,000 joint).
- Only the premium the Fair Labor Standards Act requires counts: the extra half in time and a half. Overtime an employer pays by choice beyond that doesn't.
- Itemizers and non-itemizers can both take it. You need a Social Security number, and married couples must file jointly.
- From 2026, your employer reports the amount on your W-2 in box 12, code TT.
- It lowers federal income tax only. Social Security and Medicare still come out of every overtime dollar, and state treatment varies.
Refunds, bills and your W-4
A refund is your own money coming back: more was withheld during the year than you owed. A bill means too little was withheld. A big one either way means your W-4 needs a look. The IRS suggests a new W-4 each year and whenever your personal or financial situation changes. A new job, a second job or side work, marriage and a new baby are all good times to check.
The IRS Tax Withholding Estimator walks you through it. Have your latest pay stubs (and your spouse's, if you file jointly) and last year's return. It doesn't ask for your name or Social Security number, and it doesn't save what you enter. Use its results to fill out a new W-4 for your employer.
Your Move
Do this week
- Pull your last two pay stubs and your own record of hours (a notebook, texts or a photo of the timesheet).
- Check each stub: hours, hourly rate, overtime hours at time and a half, and every deduction. Ask payroll about anything that doesn't match.
- Run the IRS Tax Withholding Estimator with your latest stub and last year's return.
- If it says to change your withholding, give your employer a new W-4.
Log it: Stub checked and withholding run.
Common questions
Is overtime taxed at a higher rate?
There's no special overtime rate. Overtime is regular wages, and your tax depends on your total income for the year. A big week can have more withheld, and your return settles the real amount.
Is a big refund a good thing?
It's your own money coming back, with no interest. Some people like it as forced savings. If you'd rather have it in your checks for your starter cushion or Winter Fund, adjust your W-4.
What does box 12, code TT on my W-2 mean?
Starting with 2026 W-2s, it shows the qualified overtime pay you may be able to deduct on your federal return.
Watch out for
- Hours or overtime missing from a stub. Keep your own record of hours every day so you can check.
- A W-2 job with no Social Security or Medicare taken out. Ask payroll why, because those taxes apply to employee wages.
Free help
- IRS Tax Withholding Estimator
- Labor Department overtime fact sheet
- VITA: free tax preparation for moderate incomes. The IRS page lists about $70,244 or less, and sites set their own limits.
Free practice
Lesson check
5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.
This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.
Sources
- IRS: Topic 751, Social Security and Medicare withholding rates; Topic 424, 401(k) plans; FS-2026-13, overtime deduction; About Form W-4; Tax Withholding Estimator; Free tax return preparation (VITA)
- Social Security Administration: Contribution and benefit base
- U.S. Department of Labor: Fact Sheet 23, overtime pay