In the United States, there are typically four types of taxes that are taken out of a pay check: federal income tax, Social Security tax, Medicare tax, and state income tax (note that not all states have an income tax, some states may levy additional taxes, and some employees might be excluded from certain taxes).
Have it in mind that both the IRS and state tax agencies publish annual tables to announce the amount of tax to be withheld from each pay check depending on the employee’s gross wages, filing status, number of withholding allowances (exemptions) and pay frequency. Meanwhile, Social Security and Medicare taxes put together are called “FICA” (Federal Insurance Contributions Act) taxes and have specific rates and thresholds.
For instance, for year 2021, the Social Security tax rate in the United States remained 6.2 percent on the first $137,700 of wages paid. The Medicare tax rate remains 1.45 percent on the first $200,000 of wages (plus an additional 0.9 percent for wages above $200,000).
However, note that every pay check is expected to show the employee’s gross pay — the total amount you earned before any taxes were withheld for the pay period. They also shows an employee’s net pay — the amount of your check after all withholdings.
4 Taxes That are Taken Out of a Paycheck in the United States
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Federal Income Tax
Every employer in the United States is expected to use information provided on the Form W-4 as well as the amount of the taxable income and how frequently you are paid in order to determine how much federal income tax withholding (FITW) to withhold from each pay check.
Note that if you earn more than usual during a pay period (such as work overtime or receive a bonus), the FITW will likely increase. And if you earn less (such as work fewer hours or increase contributions to your 401k), the FITW will as well decrease.
Also note that every employer is expected to send the federal income tax withholding to the IRS on your behalf. Your aim is to have at least enough FITW during the year to cover your expected federal income tax liability. Have it in mind that the total FITW for the year will be reported on your Form W-2 in box 2. If you are not withholding enough federal tax, it’s time to adjust your withholding using Form W-4.
Federal income tax can also be referred to as Fed Tax, FT, or FWT. Your federal withholding is more or less the amount that you have already paid the federal government. So, when you file your return, you will get a credit for this amount to apply to any tax you will owe the federal government.
State Income Tax
If your state has an income tax, you will be expected to have state income taxes withheld from your pay check. Your employer will likely leverage information provided on the state version of Form W-4 and your income to determine how much to withhold.
Note that if you owe taxes to more than one state (for example, if you work in a different state from your resident state) you may want to request that your employer withhold taxes for the other state, withhold additional taxes from your work state, or pay estimated payments to the other state to make up the difference. Although you will likely have state tax withholdings on your pay check, it tends to depend on where you live. Notably, based on your location, you might:
- Not have state withholding
- Have state withholding for more than one state — the state you live in and the state(s) you work in
- Have local withholding
Local Income Tax
Have it in mind that most local counties in the country deduct taxes from employee pay checks. If your city or local community has an income tax, your employer will be expected to withhold local taxes. Rates and rules tend to vary depending on location.
Research and find out if your employer withholds local taxes, as it can help you plan ahead and avoid surprises when you file your taxes. Local income tax might be withheld on wages you earn inside city, county, and school district boundaries. If you live or work in an area that levies a tax, your wages will be taxed by that jurisdiction.
Medicare and Social Security Taxes
Normally, you are expected to have Medicare and Social Security withholdings on each pay check. This is certain even if you have nothing withheld for federal, state, and local income taxes. In the United States, if you earn at least a specified amount for at least 40 quarters, you can get Social Security benefits when you retire.
Every employer is expected to withhold 6.2 percent of your gross income for Social Security up to income of $132,900 for 2019. And $137,700 for 2021.Your employer must also pay 6.2 percent for you that don’t come out of your pay.
However, Medicare taxes, unlike Social Security tax, go to pay for expenditures for current Medicare beneficiaries. Just like it was expressed above, your employer withholds 1.45 percent of your gross income from your pay check. Your employer pays an additional 1.45 percent, the employer part of the Medicare tax.
There are no income limits for Medicare tax, so all covered wages are subject to Medicare tax. Employers are also expected to withhold an additional 0.9 percent (2.35 percent total) of Medicare tax on earned income of more than $200,000 in a tax year.
Also note that a pay check might show deductions for health or life insurance. If it does, then note that it might also show if the premiums were deducted before tax or after tax. Before-tax deductions will reduce the income tax withholding to federal, state, and local governments.
Howbeit, some employers offer their employees the chance to contribute to retirement plans, like 401(k) s. Others offer childcare or adoption assistance. If you took advantage of any of these plans, your stub will usually show deductions for them.
Have it in mind that your pay check might also show year-to-date totals. It is very important to know if you want to estimate if you will have a refund or balance due at the end of the year. You can save the last pay check stub to compare with your W-2.
The amounts on the last stub and the W-2 amounts usually should match. Nonetheless, your employer might have added other amounts for additional benefits offered. These could be taxable income for you. Contact your payroll department if there are any differences.
Taxes taken out of pay checks are due to the government. When the taxes are not paid, are paid late, or are paid but don’t follow the correct guidelines, employers and employees likewise can face severe penalties and accrue interest. For guidance or advice specific to your business, you should consult with a tax or legal professional.