The Basic Formula: Gross Pay Minus Deductions
Payroll tax is calculated as a percentage of your gross pay — the total amount you earn before any deductions. Your employer withholds the tax from each paycheck and sends it to the IRS and your state tax authority on your behalf. The amount withheld depends on three things: your gross pay, your tax bracket, and the information you provided on your W-4 form when you were hired.
The calculation happens in this order: your employer takes your gross pay, applies federal income tax withholding based on your W-4, then subtracts Social Security tax (6.2% of gross pay) and Medicare tax (1.45% of gross pay). The result is your net pay — what actually lands in your bank account.
If you are self-employed, you calculate and pay payroll tax yourself, which is why the process feels different. But the percentages and income thresholds are the same.
Key Takeaways
- Federal income tax withholding is based on your gross pay, your tax bracket, and your W-4 form — the form you fill out when hired that tells your employer how much to withhold.
- Social Security tax is always 6.2% of your gross pay, up to a maximum income threshold that changes each year (in 2024, it was $168,600).
- Medicare tax is always 1.45% of your gross pay with no income cap, plus an additional 0.9% if you earn over $200,000 as a single filer.
- Your employer withholds these taxes from each paycheck and sends them to the IRS; you see the deductions on your pay stub.
- If too much or too little tax is withheld over the year, you settle the difference when you file your tax return.
Federal Income Tax Withholding and Your W-4
Federal income tax withholding is not a flat percentage — it depends on your tax bracket and how much you told your employer to withhold on your W-4. The IRS publishes withholding tables each year that show employers how much to take out based on your pay frequency (weekly, biweekly, monthly) and your filing status.
Your W-4 has two main parts. First, you claim dependents and other credits that lower your tax liability. Second, you can ask your employer to withhold extra money from each paycheck if you expect to owe taxes at the end of the year — for example, if you have a second job or side income. You can also request less withholding, though this means you may owe money when you file.
The withholding tables assume you work the same number of pay periods each year. If you get a bonus, work overtime, or take unpaid leave, the withholding may not match your actual tax bill. That is why many people end up with a refund or a balance due when they file their return.
Social Security Tax: 6.2% With an Income Cap
Social Security tax is 6.2% of your gross pay, taken from every paycheck. Your employer also pays 6.2% on your behalf — that is a separate cost to them, not deducted from your pay. Together, that 12.4% funds the Social Security program.
Social Security tax only applies up to a certain income level each year. In 2024, that limit was $168,600. If you earn $200,000 in a year, Social Security tax is calculated only on the first $168,600. Once you hit that threshold, no more Social Security tax is withheld for the rest of the year. This is why people with very high incomes pay a smaller percentage of their total earnings in Social Security tax.
If you work for more than one employer in the same year and your combined earnings exceed the cap, you may overpay Social Security tax. When you file your tax return, you can claim a credit for the overpayment.
Medicare Tax: 1.45% With No Cap, Plus an Extra 0.9%
Medicare tax is 1.45% of your gross pay, with no income limit. Your employer also pays 1.45% on your behalf. This 2.9% combined funds Medicare.
If you earn over $200,000 as a single filer, $250,000 as married filing jointly, or $125,000 as married filing separately, an additional 0.9% Medicare tax is withheld from your pay. This extra tax has no employer match — only you pay it. Your employer is responsible for withholding it once your earnings cross the threshold in that calendar year.
Unlike Social Security tax, there is no annual cap on Medicare tax. You pay 1.45% (or 2.35% if you are above the income threshold) on every dollar you earn, no matter how high your income goes.
How Your Pay Stub Shows the Calculation
Your pay stub breaks down the calculation line by line. At the top is your gross pay — your hourly rate times hours worked, or your salary divided by pay periods. Then come the deductions: federal income tax, Social Security, Medicare, and any state or local taxes. Some pay stubs also show voluntary deductions like health insurance premiums or retirement contributions, which come out before taxes are calculated.
The order matters. Retirement contributions (like 401(k) deferrals) are usually subtracted from gross pay before federal income tax is calculated, which lowers your taxable income. Health insurance premiums may or may not be pre-tax depending on the plan. Social Security and Medicare are calculated on your gross pay, not on the reduced amount after retirement contributions.
At the bottom of your pay stub is your net pay — what you actually receive. You can also see year-to-date totals, which show how much you have earned and how much tax has been withheld so far this year.
State and Local Payroll Taxes
Most states also withhold income tax from your paycheck, calculated the same way as federal tax — based on your gross pay, your state tax bracket, and a state W-4 form. A few states (Texas, Florida, Nevada, South Dakota, Tennessee, Washington, and Wyoming) have no state income tax. Others have flat tax rates; most use brackets like the federal system.
Some cities and counties also impose local income tax. New York City, Philadelphia, and Columbus, Ohio are examples. Local tax is calculated on gross pay and withheld separately from state tax. If you work in one city but live in another, you may owe tax to both — your employer withholds based on where you work, and you sort out any difference when you file.
Your pay stub should itemize state and local tax withholding separately so you can see exactly how much is being taken out.
What Happens if Withholding Is Wrong
If your employer withholds too much tax over the year, you receive a refund when you file your tax return. If too little is withheld, you owe money. The IRS does not charge interest or penalties if the underpayment is small, but large underpayments can result in penalties.
You can adjust your withholding at any time by submitting a new W-4 to your employer. If you expect a big refund, you might lower your withholding to get more money in each paycheck. If you expect to owe, you might increase withholding or make estimated tax payments if you have self-employment income.
The goal is to have withholding match your actual tax liability as closely as possible, so you break even at tax time rather than overpaying or underpaying.
Frequently Asked Questions
Why is my net pay less than my gross pay by more than just taxes?
Health insurance premiums, retirement contributions (401(k), 403(b)), and flexible spending account deferrals are deducted before or alongside taxes. These are not taxes but are still subtracted from your paycheck. Some are pre-tax, meaning they lower your taxable income; others are post-tax. Your pay stub itemizes each one.
Does overtime get taxed differently?
Overtime pay is taxed the same way as regular pay — it is part of your gross income and subject to the same withholding percentages. However, because your paycheck is larger that week, your federal income tax withholding may be higher if your employer uses the percentage method rather than the annualized method for withholding calculations.
What if I have two jobs — do I pay taxes twice?
You pay Social Security and Medicare tax on income from both jobs, but you may overpay Social Security tax if your combined earnings exceed the annual cap. You can claim a credit for the overpayment when you file. Federal income tax is withheld from both paychecks based on each W-4, which can lead to underpayment if you do not adjust your withholding to account for the second job.
Can I change how much tax is withheld from my paycheck?
Yes, by submitting a new W-4 form to your employer's payroll department. Changes take effect on the next paycheck or within a few pay periods. You can increase withholding, decrease it, or claim additional dependents or credits — whatever matches your expected tax liability for the year.
Why do self-employed people pay more in payroll tax?
Self-employed workers pay both the employee and employer share of Social Security and Medicare tax — 15.3% total instead of 7.65%. Employees do not see the employer share because their employer pays it separately. Self-employed people calculate and pay this tax themselves, usually quarterly, which is why it feels like a larger burden.