Your employer withholds taxes from each paycheck based on what you told them on your W-4 form

The amount deducted depends on three things: your filing status, how many dependents you claim, and your income level. When you start a job, you fill out a W-4 form (officially called the "Employee's Withholding Certificate"). Your answers tell your employer how much federal income tax to remove from each paycheck. The more dependents you claim or the more you adjust your withholding, the less comes out. The fewer you claim, the more comes out.

Your employer also withholds Social Security tax (6.2% of your gross pay) and Medicare tax (1.45% of your gross pay). These are fixed percentages that do not change based on your W-4. If you earn over $200,000 (or $250,000 if married filing jointly), an additional 0.9% Medicare tax applies. Your employer withholds these amounts whether you want them to or not — they are mandatory.

Some states and cities also withhold income tax. The amount varies by where you live and work. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) do not have state income tax at all. If your state does tax income, you may have filled out a state W-4 form as well, which works the same way as the federal one.

Key Takeaways

  • Federal income tax withholding is based on your W-4 form and changes if you update it, but Social Security and Medicare taxes are fixed percentages that always come out.
  • Social Security tax is 6.2% and Medicare tax is 1.45% of your gross pay, and your employer matches these amounts (though you only see your half deducted).
  • State and local income tax withholding varies by location and may not explore at all depending on where you live and work.
  • Your actual tax bill at the end of the year may be higher or lower than what was withheld, which is why you may owe money or receive a refund when you file your return.

How federal income tax withholding is calculated

Your employer uses IRS tables and your W-4 answers to figure out how much federal tax to remove. The IRS publishes new withholding tables each year, and your employer's payroll system applies them based on your pay frequency (weekly, biweekly, monthly, etc.). The calculation is: your gross pay minus any pre-tax deductions (like health insurance or a 401(k) contribution), then the withholding tables determine the tax.

If you claimed zero dependents on your W-4, more tax comes out. If you claimed one or more, less comes out. You can also adjust your withholding by requesting extra money be taken out, or by claiming additional income that is not from your job (like investment income). Many people use the IRS Withholding Calculator on irs.gov to figure out what they should claim so they do not owe a large amount or get a huge refund.

The W-4 form changed in 2020, and the new version no longer uses "allowances." Instead, you enter the number of dependents, claim credits, and estimate other income. If you have not updated your W-4 since before 2020, you may want to review it — your withholding might be off.

Social Security and Medicare taxes are always the same percentage

These are FICA taxes (Federal Insurance Contributions Act). Social Security tax is 6.2% of your gross pay, up to a wage limit that changes each year. In 2024, the limit is $168,600, which means once you earn that much in a year, no more Social Security tax is withheld from your remaining paychecks. Medicare tax is 1.45% of all your gross pay with no limit.

If you earn over $200,000 as a single filer (or $250,000 married filing jointly), an extra 0.9% Medicare tax is withheld. This applies to the income above those thresholds. Unlike federal income tax, you cannot change how much Social Security and Medicare tax comes out — the percentages are set by law.

Your employer also pays an equal amount of Social Security and Medicare tax on your behalf (6.2% and 1.45%), but you do not see that money come out of your check. It is a separate employer cost. When you see "FICA" on your pay stub, it refers to both Social Security and Medicare combined.

State and local income tax withholding varies by location

If you live in a state with income tax, your employer withholds it based on a state W-4 form you filled out. The percentage and calculation method differ by state. Some states use a similar system to the federal W-4; others use different forms or methods. A few states have no income tax at all, so nothing is withheld.

Some cities (like New York City and Philadelphia) also withhold local income tax. If you work in one of these cities but live elsewhere, you may owe tax to both locations. Your employer should withhold for the city where you work, not where you live. If you work in multiple states or cities during the year, your withholding may not be correct, and you could owe money or get a refund when you file.

If you moved to a new state or city during the year, update your W-4 with your employer so the withholding is correct going forward. You can also adjust your withholding if you know you will owe or overpay.

What happens if too much or too little is withheld

At the end of the year, you file a tax return that calculates your actual tax bill. If more was withheld than you owe, you get a refund. If less was withheld, you owe the difference. The goal is to have your withholding match your actual tax bill as closely as possible so you do not owe a large amount or wait months for a refund.

Many people intentionally claim fewer dependents so more is withheld, treating it as a forced savings plan. Others adjust their withholding to get closer to zero refund or owed. There is no "right" answer — it depends on your situation and whether you prefer a refund or smaller paychecks.

If you owe a large amount when you file, you can adjust your W-4 for the next year to have more withheld. If you get a large refund, you can claim more dependents or adjust your withholding to take home more money each paycheck. Use the IRS Withholding Calculator to estimate what you should claim.

Pre-tax deductions reduce the amount subject to withholding

Certain deductions come out of your paycheck before taxes are calculated. These include contributions to a traditional 401(k), health insurance premiums, and flexible spending accounts (FSAs). Because these reduce your taxable income, they also reduce the amount of federal income tax withheld.

Social Security and Medicare taxes are withheld on your full gross pay, not after pre-tax deductions. So if you contribute $200 per paycheck to your 401(k), federal income tax is calculated on a lower amount, but Social Security and Medicare taxes are still calculated on your full gross pay before the 401(k) deduction.

Post-tax deductions (like Roth 401(k) contributions, health savings accounts in some cases, or garnishments) come out after taxes are calculated, so they do not reduce your withholding. Your pay stub will show the order: gross pay, pre-tax deductions, taxable income, taxes withheld, post-tax deductions, and net pay.

Bonuses and irregular income are withheld differently

When you receive a bonus or irregular payment, your employer can withhold taxes using one of two methods. The percentage method withholds a flat 22% for federal income tax (or 37% if the bonus is over $1 million). The aggregate method combines the bonus with your regular pay for that period and calculates withholding as if the higher amount is your normal paycheck.

The aggregate method usually results in more accurate withholding if your bonus is a one-time payment. The percentage method is simpler but may over- or under-withhold. Your employer chooses which method to use, so ask your payroll department which one they explore.

Bonuses are still subject to Social Security and Medicare taxes at the regular rates. If your bonus pushes you over the Social Security wage limit for the year, no Social Security tax is withheld on the amount over the limit.

Frequently Asked Questions

Why do I owe taxes if my employer withheld money all year?

Withholding is an estimate based on your W-4 answers. If your actual tax bill is higher than what was withheld — because you have other income, claimed too many dependents, or your situation changed — you owe the difference. Filing a tax return calculates what you actually owe, not what was withheld.

Can I change my withholding in the middle of the year?

Yes. You can submit a new W-4 to your employer at any time, and the new withholding takes effect on your next paycheck. If you know you will owe money, updating your W-4 to claim fewer dependents will increase withholding for the rest of the year.

What if I have two jobs — how is withholding calculated?

Each employer withholds based on the W-4 you gave them, treating each job as if it is your only income. This often results in under-withholding because the tax brackets are not split between jobs. Use the IRS Withholding Calculator and enter both jobs to see if you need to adjust your W-4 at one or both employers.

Do I have to let my employer withhold Social Security and Medicare taxes?

No, you cannot opt out of Social Security and Medicare withholding — it is mandatory for all employees. The only exception is if you are a student working part-time at your school, or a member of certain religious groups that have exemptions. For almost all workers, these taxes come out automatically.

Why is my paycheck less than I expected after taxes?

Your paycheck is your gross pay minus federal income tax, Social Security tax, Medicare tax, state and local taxes (if applicable), and any pre-tax deductions like 401(k) or health insurance. All of these reduce your net pay. If you claimed zero dependents on your W-4, federal withholding alone can be 10–22% of your gross pay.