GradReady Real-World Finance Practice Exam

The term that refers to the portion of a paycheck typically withheld for taxes and other expenses is deductions. Deductions are amounts subtracted from an employee's gross income to determine net income. These can include federal and state taxes, social security contributions, health insurance premiums, and retirement plan contributions.

Understanding this term is crucial because it helps individuals grasp their take-home pay versus what is actually earned. Gross income represents the total earnings before any deductions are applied, while net income is the amount that remains after all deductions have been taken out. Taxable income is the portion of income that is subject to income tax after all deductions and exemptions are applied, but this is not what is withheld on a paycheck. Instead, deductions specifically detail those amounts taken out from the gross income.