Federal income tax, Social Security, and Medicare take the largest cuts

Your employer removes money from your paycheck before you see it. The amount depends on what you earn, where you live, and what you told your employer on your W-4 form. Most paychecks lose 15 to 25 percent to federal income tax, Social Security, and Medicare combined. State and local taxes add more in most places.

The three mandatory federal deductions are federal income tax, Social Security tax (6.2 percent of your gross pay), and Medicare tax (1.45 percent of your gross pay). Federal income tax varies based on your W-4 answers and your total income for the year. Social Security and Medicare are fixed percentages that apply to almost all workers.

Your employer also withholds state income tax in 41 states, and local income tax in some cities and counties. A few states have no income tax at all. The rate depends on where you work and live, not where you were born.

Key Takeaways

  • Social Security and Medicare taxes are fixed at 6.2 percent and 1.45 percent and come out of every paycheck for most workers.
  • Federal income tax withholding depends on your W-4 form and changes if you get a raise, lose a job, or have a major life change.
  • State and local income taxes vary by location and can range from zero to over 10 percent depending on where you work.
  • You can adjust your federal withholding by filing a new W-4 with your employer if you are having too much or too little taken out.

How federal income tax withholding is calculated

Your employer uses your W-4 form and IRS withholding tables to decide how much federal income tax to remove each pay period. The W-4 asks how many dependents you claim, whether you have a second job, and whether you expect to owe money or get a refund at tax time. The more dependents you claim, the less your employer withholds.

Federal withholding is not a fixed percentage. It depends on your total income for the year, your filing status, and your W-4 answers. Two people earning the same weekly pay can have different amounts withheld if they filled out different W-4s. You can change your W-4 at any time by giving your employer a new form.

If you are having too much withheld and want a bigger paycheck, you can claim more dependents on a new W-4. If you are having too little withheld and want to avoid owing money at tax time, you can claim fewer dependents or ask your employer to withhold an extra amount each pay period.

Social Security and Medicare taxes are the same for everyone

Social Security tax is 6.2 percent of your gross pay, up to a cap. In 2024, you stop paying Social Security tax once you earn $168,600 for the year. After that point, no more Social Security tax comes out, even if you earn more. Medicare tax is 1.45 percent of all your gross pay with no cap — it keeps coming out no matter how much you earn.

If you are self-employed, you pay both the employee and employer portions of these taxes, which doubles the rate. If you work for an employer, they pay the employer portion and you pay only the employee portion shown on your stub.

These taxes fund Social Security retirement and disability benefits and Medicare health insurance. You build credits toward these programs with each paycheck. The amount you paid in does not directly determine what you receive later, but your work history does affect your benefit amount.

State and local income taxes vary widely by location

Forty-one states have an income tax. The rates range from less than 1 percent to over 13 percent depending on the state and your income level. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). If you work in one of these states, no state income tax comes out of your paycheck.

Some cities and counties also charge local income tax on top of state tax. This is common in Ohio, Pennsylvania, Kentucky, and parts of other states. Local rates are usually between 1 and 3 percent. You pay local tax based on where you work, not where you live, so if you work in a city with local income tax but live outside it, the tax still comes out.

Your employer withholds state and local taxes based on forms you fill out when you are hired. Like the federal W-4, you can adjust these forms if you want more or less withheld, though the process varies by state and locality.

Other deductions that may appear on your paycheck

Beyond taxes, your employer may remove money for health insurance premiums, retirement plan contributions, life insurance, or flexible spending accounts. These are called pre-tax deductions because they reduce the amount of income that federal income tax is calculated on. If you contribute to a traditional 401(k) or health savings account, that money comes out before federal income tax is applied.

Some deductions are post-tax, meaning they come out after federal income tax is calculated. These include Roth 401(k) contributions, some life insurance premiums, and union dues in some cases. Your pay stub should label each deduction as pre-tax or post-tax.

Child support orders, wage garnishments, and court-ordered debt payments also come out of paychecks. These are removed after taxes and are not optional — your employer is required by law to withhold them.

How to read your pay stub and understand the numbers

Your pay stub shows gross pay (what you earned before anything is removed), each deduction, and net pay (what you actually receive). The stub lists federal income tax withheld, Social Security, Medicare, state tax, local tax, and any other deductions. It also shows year-to-date totals for each category, which helps you track how much you have paid in taxes so far this year.

If a deduction looks wrong, check your W-4 first. If you claimed too many dependents, federal income tax will be lower than it should be, and you may owe money at tax time. If you claimed too few, federal income tax will be higher, and you will likely get a refund. Neither is illegal — it just affects whether you owe or get money back when you file your tax return.

Your pay stub is also your record of how much Social Security and Medicare tax you paid. When you file your tax return, the IRS matches what your employer reported to what you claim. Keep your pay stubs for at least three years in case you need to prove your income or dispute a tax issue.

What happens if too much or too little is being withheld

If you are getting a large refund every year, too much federal income tax is being withheld. You can file a new W-4 and claim more dependents to increase your paycheck and reduce your refund. The opposite is true if you owe money at tax time — you can claim fewer dependents to have more withheld now so you do not owe later.

Major life changes should trigger a W-4 update. If you get married, divorced, have a child, buy a house, or get a second job, your withholding may need to change. The IRS website has a withholding calculator that can help you figure out what to claim.

Social Security and Medicare withholding cannot be adjusted — they are fixed by law. State and local taxes also cannot be avoided if you work in a state or locality that has them. The only withholding you can control is federal income tax through your W-4.

Frequently Asked Questions

Why do I pay Social Security tax if I might not get the full benefit?

Social Security tax funds current retirees and disabled workers, not just your own future benefit. You build credits toward your own retirement and disability benefits, but the system is pay-as-you-go. Even if you do not receive the full amount you paid in, you are building a safety net for yourself and contributing to benefits for current recipients.

Can my employer withhold more than the IRS says to?

Yes. You can ask your employer to withhold extra federal income tax each pay period by writing it on your W-4. This is useful if you have income from other sources that your employer does not know about, like self-employment or investment income.

What if I have two jobs — do I pay Social Security tax on both?

Yes, you pay 6.2 percent Social Security tax on earnings from both jobs until you hit the annual cap. If you earn $168,600 at one job and then get a second job, you will pay Social Security tax on the second job until your combined earnings reach the cap. You can claim a credit on your tax return for the overpayment.

Do I have to claim dependents on my W-4 if I do not have any?

No. If you have no dependents, you can claim zero on your W-4. This will result in more federal income tax being withheld, but it ensures you do not underpay. You can always adjust your W-4 later if your situation changes.

Is the money withheld for taxes actually going to the government?

Yes. Your employer is required by law to send withheld federal, state, and local taxes to the appropriate government agencies. Social Security and Medicare taxes go to the Social Security Administration and Centers for Medicare and Medicaid Services. Your employer cannot keep this money or use it for business expenses.