Net pay is the amount an employer must pay an employee after all deductions are taken. Examples of these deductions include federal income tax, FICA (Federal Insurance Contributions Act), and state or local income taxes. In addition, other deductions may be taken such as health care, pension contributions, and union dues. Federal income tax, and FICA tax, (also known as social security and Medicare tax), are often the largest deductions withheld from an employees' earnings.

Federal Income Tax

Except for certain types of employment, taxes must be withheld from employees' earnings for payment of their federal income tax. The amount deducted for federal withholding can vary considerably depending on the employee's marital status, number of withholding allowances (dependents), and whether any additional withholding is authorized.

Also, the IRS has different wage brackets for different levels of income. Generally, as wages increase, the percentage withheld for federal income tax increases. Circular E from the IRS provides information on the correct amount of federal income taxes to withhold.