Your offer letter said $55,000, you divided by 26 paychecks and expected $2,115 — and the deposit says $1,697. Nobody stole from you; you met the tax system, and how you are paid (W-2 employee or 1099 contractor) changes what it takes.
The big picture: pay-as-you-go
The United States taxes income as you earn it, not in one bill in April. Every payday your employer sends a slice of your pay to the government on your behalf. That slice is withholding.
Once a year, by April 15, you file a tax return that works out what you actually owed for the year and compares it with what was withheld:
- Withheld more than you owed? You get a refund.
- Withheld less than you owed? You pay the difference.
A tax return is a reconciliation, not a bill. Keep that in mind and everything else clicks.
What actually comes out of your paycheck
Priya earns $55,000 a year, is paid every two weeks, files single and lives in a state with a 4% flat income tax. Here is where each $2,115.38 paycheck goes, using the same model as the paycheck calculator: the $15,750 standard deduction for 2025, the 2025 federal brackets, and no credits or benefit premiums. Over a year that is $4,471.50 of federal income tax, $3,410 of Social Security, $797.50 of Medicare and $2,200 of state tax, leaving $44,121 of take-home pay.
| Deduction | Roughly | What it funds |
|---|---|---|
| Federal income tax | $171.98 | Roads, defense, schools, federal programs |
| Social Security (6.2%) | $131.15 | Retirement, disability and survivor benefits |
| Medicare (1.45%) | $30.67 | Health coverage from age 65 |
| State income tax (4%) | $84.62 | Your state's budget |
| Take-home | $1,696.96 | You |
That is 19.8% of Priya's gross pay, and two things stand out:
- Social Security and Medicare — together FICA, 7.65% of every dollar — come out at a flat rate from the first paycheck of the year (Social Security stops above the $176,100 wage base for 2025). Your employer pays a matching 7.65% on top of your wages. Remember that; it is the whole story of the 1099 section.
- Federal income tax is not a flat rate. Payroll estimates it from your pay and the W-4 form you signed when you were hired, and the brackets lesson shows exactly how the $4,471.50 is built: 10% on the first $11,925 of taxable income, 12% on the rest.
W-2 vs 1099: two very different deals
The form numbers are the names of the documents you receive each January, but they stand for two different working arrangements.
W-2: you're an employee
Your employer:
- withholds taxes from every paycheck for you,
- pays half of your FICA — 7.65% from you, 7.65% from them,
- can offer benefits: health insurance, a 401(k), paid time off,
- sends you a Form W-2 each January summarizing your pay and withholding.
Filing as a W-2 employee is simple: copy a few boxes into the return (or let software do it) and you are mostly done.
1099: you're your own business
If you freelance, drive for an app or contract, each client that paid you $600 or more in 2025 sends a Form 1099-NEC ($2,000 or more for payments made in 2026). Now you are the employer:
- Nothing is withheld. A $1,000 client payment is 100% pre-tax money, and part of it is not yours.
- You pay both halves of FICA — 15.3%, called self-employment tax, charged on 92.35% of your net profit.
- You send the IRS quarterly estimated payments — due April 15, June 15, September 15 and January 15 — instead of waiting for tax season.
- No benefits, no employer 401(k) match, no paid leave.
In exchange you get flexibility and the right to deduct business expenses — equipment, mileage, a home office — before tax is calculated.
Why this matters at job-offer time
A $30-an-hour 1099 contract is not automatically better than a $26-an-hour W-2 job with benefits. Taxes alone make a 1099 dollar worth about 7% less than a W-2 dollar (keeping $785.88 versus $842.20 per $1,000). Then add what the contract does not include: a 401(k) match (4% of pay is a common design), paid time off (15 days is 5.8% of a 260-day work year) and health insurance you now buy yourself. Price each of those before you compare hourly rates, and use the budget calculator to see what the contract must pay to leave you level.