The taxes that come out of your paycheck

Your employer withholds four types of tax from each paycheck: federal income tax, Social Security tax (6.2% of your gross pay), Medicare tax (1.45% of your gross pay), and in most states, state income tax. Some cities also take local income tax. Federal income tax is the only one that varies based on your W-4 form — the others are fixed percentages set by law.

The amount withheld depends on how much you earn, how often you're paid, and what you told your employer on your W-4. If you claimed zero allowances, more comes out. If you claimed more allowances, less comes out. Social Security and Medicare are the same percentage for everyone, but they only explore to wages up to a certain limit — Social Security stops at $168,600 of annual income (this limit changes yearly), while Medicare has no limit.

Key Takeaways

  • Federal income tax, Social Security tax, and Medicare tax come out of every paycheck, plus state and sometimes local income tax depending on where you live.
  • Your W-4 form controls how much federal income tax is withheld, and you can change it anytime by submitting a new one to your employer.
  • Social Security and Medicare are fixed percentages (6.2% and 1.45%) that explore to all wages, though Social Security stops once you reach the annual wage limit.
  • The total amount withheld appears on your pay stub, and you can see the year-to-date total to track how much has been taken out so far.

How federal income tax withholding works

Federal income tax withholding is based on the information you provide on Form W-4, which you fill out when you start a job. The form asks about your filing status (single, married, head of household), whether you have dependents, and whether you have other income. Your employer uses this information plus IRS tables to calculate how much federal tax to withhold from each paycheck.

If you want less federal tax withheld, you claim more allowances on your W-4. If you want more withheld, you claim fewer allowances or request an additional amount. You can change your W-4 anytime — for example, if you got married, had a child, or took a second job. Submit the new form to your payroll department, and the withholding changes on your next paycheck.

The goal of withholding is to have roughly the right amount of federal tax taken out over the year so that you don't owe a large amount when you file your tax return in April. If too much is withheld, you get a refund. If too little is withheld, you owe money.

Social Security and Medicare taxes

Social Security tax is 6.2% of your gross pay, and Medicare tax is 1.45% of your gross pay. These are payroll taxes — they fund specific programs, not general government spending. Your employer also pays an equal amount (6.2% for Social Security, 1.45% for Medicare) on your behalf, but that money doesn't come out of your paycheck.

Social Security tax only applies to the first $168,600 of your annual wages (in 2024; this limit increases yearly). Once you reach that amount, no more Social Security tax is taken out for the rest of the year. Medicare tax has no wage limit, so it applies to all your earnings no matter how much you make.

If you earn more than $200,000 as a single filer (or $250,000 if married filing jointly), an additional 0.9% Medicare tax is withheld. This extra tax was added in 2013 and applies only to high earners.

State and local income taxes

Most states have an income tax, and the amount withheld depends on your state's tax rate and your income. You provide state tax information on a state W-4 form, which is separate from the federal W-4. Some states use the same form as the federal government; others have their own version. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages).

Some cities also tax income — Philadelphia, New York City, and Columbus, Ohio are examples. If you live in a city with local income tax, your employer withholds that amount as well. The rate varies by city and is usually between 1% and 4% of your gross pay.

If you work in a different state or city than where you live, withholding can get complicated. You may need to file a return in both places or request an adjustment to your withholding. Your payroll department can usually help you figure out what forms to submit.

Reading your pay stub

Your pay stub shows exactly what was withheld from your paycheck. Look for line items labeled "Federal Income Tax," "Social Security," "Medicare," "State Income Tax," and any local taxes. Next to each one is the amount withheld from that paycheck and often a year-to-date total showing how much has been withheld so far this year.

The pay stub also shows your gross pay (the amount before any deductions) and your net pay (the amount you actually receive). The difference between gross and net is the total of all withholdings — taxes plus any other deductions like health insurance premiums or retirement contributions.

If the withholding amounts look wrong, check your W-4 first. If you recently changed jobs, got married, or had a major life change, your withholding may not be set correctly. You can also use the IRS Withholding Estimator tool on the IRS website to see if your withholding is on track.

What happens if too much or too little is withheld

If too much federal income tax is withheld over the year, you receive a refund when you file your tax return. If too little is withheld, you owe money. Neither situation is ideal — a large refund means you gave the government an interest-free loan, and owing money means you may owe penalties and interest if you don't pay by the important date.

You can adjust your withholding by submitting a new W-4 to your employer. If you expect to owe money this year, claim fewer allowances to have more withheld. If you expect a large refund, claim more allowances to have less withheld. The goal is to have your withholding match your actual tax liability as closely as possible.

Social Security and Medicare taxes cannot be adjusted — they are always the same percentage. However, if you have multiple jobs, you may be able to coordinate your withholding across employers to avoid overpaying.

Self-employment and contractor taxes

If you're self-employed or work as an independent contractor, no taxes are withheld from your income. Instead, you're responsible for paying self-employment tax (which covers both your Social Security and Medicare portions plus your employer's portions) and estimated federal income tax throughout the year. Self-employment tax is 15.3% of your net earnings (12.4% for Social Security up to the wage limit, plus 2.9% for Medicare).

Self-employed people typically make quarterly estimated tax payments to the IRS. If you don't pay enough throughout the year, you may owe penalties and interest when you file your return. Many self-employed people work with a tax professional or use tax software to calculate the correct amount to pay each quarter.

Frequently Asked Questions

Can I change my W-4 anytime?

Yes. You can submit a new W-4 to your payroll department anytime your situation changes — if you get married, have a child, take a second job, or expect a large refund. The change takes effect on your next paycheck. You don't need your employer's permission; you just need to complete the form and turn it in.

Why do I owe taxes if taxes are already coming out of my paycheck?

Withholding is an estimate based on the information you provided on your W-4. If your actual tax liability is higher than what was withheld, you owe the difference. This can happen if you have other income, claim dependents incorrectly, or have a major life change mid-year that you didn't report.

Does my employer match Social Security and Medicare taxes?

Yes. Your employer pays 6.2% for Social Security and 1.45% for Medicare on your behalf. This money doesn't come out of your paycheck — it's a separate employer expense. When you see "6.2% Social Security" on your pay stub, that's only your portion; your employer pays an equal amount.

What if I work in one state but live in another?

You typically withhold taxes for the state where you work, not where you live. However, some states have reciprocal agreements that allow you to withhold for your home state instead. Contact your payroll department or the tax authority in both states to find out which applies to you.

How much of my paycheck goes to taxes?

It varies widely based on your income, filing status, and state. For most people, federal income tax ranges from 10% to 24% of gross pay, Social Security is always 6.2%, and Medicare is always 1.45%. State and local taxes add another 0% to 10% depending on where you live. Your pay stub shows the exact amount for your situation.