What Gets Taken Out of Your Paycheck and Why
Your employer removes taxes from each paycheck before you see the money. The amount depends on what you earn, where you live, how many dependents you claim, and whether you have other income. Federal income tax, Social Security tax, and Medicare tax come out of almost every paycheck. Depending on your state, local income tax may also be deducted.
The federal government uses these deductions to fund Social Security, Medicare, and general government operations. Your state and local governments use their portions for schools, roads, and public services. Understanding what each deduction is and how it is calculated helps you know whether your employer is withholding the right amount — too much, and you overpay; too little, and you owe money at tax time.
Key Takeaways
- Federal income tax withholding is based on your W-4 form, which tells your employer how many allowances to claim and whether you have a second job or spouse income.
- Social Security tax is 6.2 percent of your gross pay up to a yearly cap (in 2024, the cap is $168,600), and Medicare tax is 1.45 percent with no cap.
- Your state and local income tax rates vary by location and are calculated as a percentage of your gross or adjusted income.
- You can estimate your take-home pay by adding up federal, state, and local tax withholdings, then subtracting them from your gross pay.
- If your withholding is wrong, you can adjust it by filing a new W-4 with your employer or asking for additional withholding.
Federal Income Tax Withholding
Federal income tax withholding is calculated using your W-4 form and the IRS withholding tables. When you start a job, you fill out a W-4 to tell your employer how much tax to hold back. The form asks for your filing status (single, married, head of household), the number of dependents you claim, and whether you have income from a second job or a spouse.
Your employer uses this information and your pay frequency to look up the withholding amount in IRS tables. If you earn $1,500 biweekly as a single person with no dependents, your employer finds that row in the table and subtracts the corresponding federal tax. The more allowances you claim on your W-4, the less federal tax is withheld. The fewer allowances, the more is withheld.
You can also request additional withholding on your W-4 if you know you will owe money at tax time — for example, if you have investment income or a side business. This extra amount comes out each pay period and reduces what you owe when you file your return.
Social Security and Medicare Taxes
Social Security tax is 6.2 percent of your gross pay, up to a yearly earnings cap. In 2024, you pay Social Security tax only on the first $168,600 you earn; anything above that is not taxed for Social Security. Once you hit that cap during the year, your employer stops taking out Social Security tax for the rest of the year.
Medicare tax is 1.45 percent of your gross pay with no earnings cap — you pay it on every dollar you earn, no matter how much. If you earn $50,000, your Medicare tax is $725. If you earn $200,000, your Medicare tax is $2,900.
Together, Social Security and Medicare are called FICA taxes (Federal Insurance Contributions Act). Your employer also pays an equal amount on your behalf — 6.2 percent for Social Security and 1.45 percent for Medicare — but that money does not come out of your paycheck. If you are self-employed, you pay both the employee and employer portions, which is why self-employment tax is higher.
High earners pay an additional 0.9 percent Medicare tax on wages above $200,000 (single) or $250,000 (married filing jointly). This extra tax comes out of your paycheck if you cross that threshold.
State and Local Income Tax
State income tax rates vary widely. Some states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming). Others tax income at rates ranging from about 1 percent to over 13 percent. Your state tax withholding is calculated the same way as federal tax — your employer uses your W-4 information and state withholding tables to determine the amount.
Local income tax is less common but exists in some cities and counties, particularly in Ohio, Pennsylvania, Kentucky, and Indiana. Local tax rates are usually between 1 and 2.5 percent and are withheld separately from state tax. If you work in a city with local income tax but live outside it, you may owe local tax to your work city, your home city, or both — the rules depend on your location.
If you move to a new state or city during the year, tell your employer so they can adjust your withholding. Failing to do so can result in underpayment or overpayment of state and local taxes.
How to Calculate Your Take-Home Pay
Start with your gross pay — the amount before any deductions. Then subtract each tax withholding in order: federal income tax, Social Security tax, Medicare tax, state income tax, and local income tax if applicable. The result is your net pay, or take-home pay.
Here is an example. You earn $2,000 biweekly as a single person with no dependents in a state with 5 percent income tax and no local tax. Your deductions would look like this:
| Gross Pay | $2,000.00 |
| Federal Income Tax (from IRS tables) | –$185.00 |
| Social Security Tax (6.2%) | –$124.00 |
| Medicare Tax (1.45%) | –$29.00 |
| State Income Tax (5%) | –$100.00 |
| Net Pay (Take-Home) | $1,562.00 |
Your federal income tax amount depends on your W-4 entries and the IRS withholding tables for your pay frequency. If you want to know the exact federal amount, you can use the IRS withholding calculator on irs.gov, which asks you the same questions as your W-4 and tells you whether your withholding is correct.
When Your Withholding Is Wrong
If too much tax is being withheld, you will get a refund when you file your tax return — but that means you gave the government an interest-free loan all year. If too little is being withheld, you will owe money at tax time, which can be a surprise. Either situation can be fixed by adjusting your W-4.
File a new W-4 with your employer if your life changes — you get married, have a child, take a second job, or your spouse starts working. You can also adjust your withholding if you know from last year's tax return that you overpaid or underpaid. The IRS withholding calculator can tell you what to enter on your new W-4 to get closer to the right amount.
Changes to your W-4 take effect on your next paycheck or within a few pay periods, depending on your employer's payroll system. There is no penalty for changing your W-4 — you can do it as many times as you need to.
Other Deductions That Are Not Taxes
Your paycheck stub may also show deductions that are not taxes: health insurance premiums, retirement plan contributions (like a 401(k)), flexible spending account contributions, and union dues. These are separate from tax withholding and reduce your take-home pay but are not sent to the government as taxes.
Some of these deductions are made before federal income tax is calculated (called pre-tax deductions), which lowers your taxable income. For example, if you contribute $200 to your 401(k) and earn $2,000, your federal income tax is calculated on $1,800, not $2,000. Other deductions, like health insurance premiums, may be pre-tax or post-tax depending on your plan.
Understanding which deductions are pre-tax can help you plan your withholding. If you have large pre-tax deductions, your federal income tax withholding may be lower than you expect because it is based on your reduced taxable income.
Frequently Asked Questions
Why is my federal income tax withholding different from my coworker's if we earn the same amount?
Your W-4 entries determine your withholding. If your coworker claims more dependents, has a spouse with income, or requested additional withholding, their amount will differ from yours. Filing status also matters — a married person and a single person earning the same amount have different withholding.
What happens if I claim zero allowances on my W-4?
Claiming zero allowances tells your employer to withhold the maximum federal income tax from each paycheck. This usually results in a refund at tax time but means less money in your pocket during the year. Most people claim at least one allowance to reduce withholding.
Do I pay Social Security tax on my entire paycheck?
No. Social Security tax applies only to earnings up to the yearly cap, which changes each year. In 2024, the cap is $168,600. Once you earn that amount, your employer stops taking out Social Security tax for the rest of the year. Medicare tax has no cap and applies to all earnings.
Can I reduce my tax withholding to take home more money?
You can adjust your withholding by filing a new W-4, but reducing it too much means you will owe money at tax time. Use the IRS withholding calculator to find the right amount for your situation rather than guessing.
What if I work in one state but live in another?
You typically owe income tax to the state where you work, not where you live. Tell your employer which state to use for tax withholding. Some states have reciprocal agreements that may change this rule, so check your state's tax authority website if you live near a border.