Unit 1: Earning Income, Paychecks and Taxes

Last updated 10/14/2026 by

Andrew Latham

Summary:

Most people earn money before they ever borrow it. A first paycheck that is noticeably smaller than hours times wage is many people’s first financial surprise. Knowing where that money went, and how taxes work, makes every later decision easier.

This is Unit 1 of 9 in Money 101 by SuperMoney, a free personal finance course. It takes about 2 weeks in a classroom, or 45 to 90 minutes on your own. Then take the five-question quiz below. Score 4 of 5 to mark the unit complete.

What you’ll learn

Explain the difference between gross pay and net pay and read every line of a pay stub.
Fill out a Form W-4 and explain what withholding does.
Describe federal income tax, state income tax, Social Security and Medicare.
Explain where a tax refund comes from and how to change its size.
Compare W-2 employment with 1099 gig work, including self-employment tax.
Explain how benefits and education affect total compensation over a career.

Key terms

Gross pay: What you earn before anything is taken out: hours worked times hourly wage, or your salary for the period.
Net pay: What actually lands in your bank account after taxes and deductions. Also called take-home pay.
Withholding: Tax your employer takes from each paycheck and sends to the government on your behalf.
FICA: Social Security (6.2%) and Medicare (1.45%) taxes. Together 7.65% of most paychecks.
Form W-4: The form you give your employer that tells them how much federal income tax to withhold.
Form W-2: The form your employer sends you after the year ends showing what you earned and what was withheld.
Form 1099-NEC / 1099-K: Forms that report income from freelance, gig or app-based work where nothing was withheld.
Marginal tax rate: The rate you pay on your last dollar of income. Moving into a higher bracket only raises the tax on the dollars inside that bracket.
Self-employment tax: The Social Security and Medicare tax gig workers pay themselves, about 15.3% of net self-employment earnings.

Lesson 1.1: Gross pay vs. take-home pay

When you take a job paying $15 an hour, you might expect a 20-hour week to put $300 in your account. It will not. The $300 is your gross pay. Before it reaches you, your employer subtracts taxes and any deductions you signed up for. What is left is your net pay.

Every pay stub has the same basic parts: your gross pay for this period and for the year so far, a list of taxes withheld, a list of other deductions (health insurance, retirement contributions), and your net pay. Check every line of your first few pay stubs. That is how people catch missing hours or the wrong tax setting.

The two taxes almost everyone pays from the first dollar are Social Security (6.2%) and Medicare (1.45%), together called FICA. Federal income tax depends on how much you earn in the whole year and what you put on your W-4. Many students who work part time end up owing little or no federal income tax, but FICA is still withheld. Most states also have an income tax, and some cities do too.

Lesson 1.2: How income tax works

The U.S. uses tax brackets. Your income is split into layers, and each layer is taxed at its own rate. If you earn enough to reach a higher bracket, only the dollars inside that bracket are taxed at the higher rate. Plenty of people believe a raise can shrink their paycheck by pushing them into a higher bracket. It can’t.

Before any brackets apply, most people subtract the standard deduction, an amount of income that is not taxed at all. For a teenager with a part-time job, the standard deduction often covers all of their wages, which is why they can get back most or all federal income tax withheld by filing a return.

A refund means you had more withheld during the year than you owed. It is your own money, returned without interest. A very large refund every year means you could have had that money in your paychecks instead. Owing money at tax time means too little was withheld. Neither is good or bad on its own, but you control it through the W-4.

You file a federal return by April 15 for the year before. Free options include IRS Free File and the free versions of commercial software for simple returns. If you earned money but had federal tax withheld and owe none, you must file to get it back.

Lesson 1.3: Gig work and the 1099

Delivery apps, ride-share, tutoring, babysitting through an app and selling online often pay you as an independent contractor. Nothing is withheld. Instead of a W-2 you may receive a 1099 form, and you are responsible for your own taxes.

If your net self-employment earnings (income minus business expenses) are $400 or more in a year, you must file a federal return and pay self-employment tax of about 15.3% on most of those earnings. That is both halves of Social Security and Medicare, because there is no employer paying half for you. You may also owe income tax.

One habit protects gig workers: move a share of every payout, often 20% to 30%, into a separate savings account the day it arrives. Track mileage and expenses, because they reduce what you owe. If you expect to owe $1,000 or more for the year, the IRS expects you to pay in quarterly estimated payments.

Lesson 1.4: Total compensation and your career

A job is worth more than its wage. Health insurance, a retirement plan match, paid time off, tuition help and training all have real dollar value. When comparing two offers, add the value of benefits to the pay.

Over a lifetime, the biggest driver of income is what you can do: education, certifications, skills and experience. That does not always mean a four-year degree. Apprenticeships, trade licenses and community college certificates often lead to strong earnings with far less debt. Unit 6 covers how to compare those paths.

Worked example: one week at $15 an hour

Assumes 20 hours, $15 an hour, 10% federal withholding from the W-4 settings, 4% state tax, no other deductions. Real withholding depends on your W-4, your state and your total annual pay.

Gross pay (20 hrs x $15)	$300.00
Social Security (6.2%)	-$18.60
Medicare (1.45%)	-$4.35
Federal income tax withheld (10%)	-$30.00
State income tax withheld (4%)	-$12.00
Net pay	$235.05

Takeaway: About 22% never reached the paycheck. If this student’s yearly earnings fall under the standard deduction, filing a tax return gets the $30 a week of federal withholding back.

Activity: Decode the pay stub

Use the sample pay stub in the Document Pack (Appendix A). Answer each question, then repeat the math as a gig worker who earned the same $300 with nothing withheld.

What is the gross pay for this period? For the year to date?
List every tax withheld and its amount.
What percent of gross pay is the net pay?
If this worker had a 1099 job instead, how much should they set aside from $300 at 25%?
Name one thing you would check on your first real pay stub.

The printable worksheet and the sample documents for this activity are in the Money 101 course book (PDF).

Reflect: Would you rather get a large refund each spring or have more in each paycheck? Explain your choice.

Up next: Unit 2: Banking and Payment Tools | Course overview

Andrew Latham

Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.

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