Lesson 12:
Net vs. Gross Income
It can be a big shock when teens receive their first paychecks and realize that a large portion of their earnings is deducted for taxes. This lesson helps you understand how to make sense of all the line items on your paystub. You will also analyze earnings statements to determine how setting up automatic savings deposits and adjusting deductions can help you increase your savings.
Learning Objectives:
- Explore different payroll deductions
- Learn about annual tax returns
- Analyze employer-sponsored savings programs
Essential Question: “How much money will I take home from my paycheck?”
Investigate: Paychecks Please
[Time Required: 10 minutes]
- Read the statements below and spot the false claim.
- My net income is the money I get to deposit in my bank account
- I don’t have to pay taxes because I’m not 18 years old yet
- I signed up for direct deposit, so I won’t get a physical check with my paystub
- B is the false statement because even minors have to pay taxes on money they earn.
- This lesson is about net earnings, taxes and other deductions you may encounter on your paystubs, as well as how you can make the most out of deductions to maximize savings.
Student Preparation: Paystub Puzzles
[Time Required: 15 minutes]
- Have you ever seen a paystub before? For a part-time job or has anyone ever shown you one?
- Download the student activity sheet Paystub Puzzles: Putting the Pieces Together and review the first example.
- Understand what each part of the earnings statement means, and understand that gross income is what you earn before taxes and net income is what you actually get to take home.
- Why does the government require taxes to be taken out of every paycheck? Do you know what services federal and state taxes pay for?
- Using the activity sheet, understand Federal, State, Medicare and Social Security taxes, why these taxes are deducted from paychecks. At the end of the year, employers send W-2 forms that outline money earned and deductions incurred each year. The W-2 is used to file an annual tax return—you will either get a refund on your taxes or owe more depending on how much was deducted from your pay throughout the year.
Challenge: Hunt for Savings
[Time Required: 25 minutes]
- There are ways to claim tax deductions while maximizing savings. For example, contributing to a 401(k) or automatic savings deposit increases deductions and also long-term savings. If money is deducted for a medical FSA but the account is unused, minimizing FSA contributions frees up money for long-term savings accounts like a 401(k).
- Next, review the remaining paystubs on Paystub Puzzles: Putting the Pieces Together.
Reflection
[Time Required: 5 minutes]
Write in your notebook about the elements you will consider in the future when it comes to payroll deductions. Will you consider contributing to a 401(k), FSA, or direct-deposit savings when you earn a paycheck? Why or why not?
Americans aren’t typically known for their financial responsibility – yet many are already using complex financial strategies. For example, shopping at the mall calls for cost comparisons, and saving for a skateboard requires budgeting. To learn about responsible money management, it’s important to take a look at the building blocks of financial decision-making. In this lesson, we will examine the spending decisions students already make. Then examine real-life spending scenarios and research, analyze, and present their recommendations.
Learning Objectives:
- Explore personal financial choices
- Learn to make informed financial decisions
- Consider what it means to be financially responsible

Worksheet One: