Which taxes get taken out of your paycheck?
Payday is every employee’s favorite day, but paychecks can often be confusing.
Every employee has taxes taken out from their paycheck, but those taxes may differ depending on factors such as your marital status and what state you live in. You need to understand which taxes get taken out of your paycheck to avoid any surprises come payday or tax season.
Keep reading to learn what taxes are taken out of your paycheck, what factors determine how much is taken out, and understand what control you have over your deductions.
What’s Included in Your Paycheck?
Although it is tempting to look at the amount deposited into your bank account every two weeks and move on, your paycheck is more than the number you see on your bank statement (take-home pay).
Your paycheck is generally your gross pay minus deductions to give you your net pay, which is the amount that you see on your paycheck.
Your gross pay is your total earnings from your pay period before taking out any deductions.
Deductions are wages withheld from your total earnings (gross pay) to pay taxes and benefits like health insurance.
For the most part, you will find the following information on your pay stub:
- Name of employer and contact information
- Employee information (name, address, social security number)
- Pay period covered (start and end dates)
- Gross earnings
- Other earnings (vacation pay, bonuses)
- List of payroll deductions
- Taxes withheld (state and federal)
- Total deductions
- Net earnings
- Total paycheck amount
- Total year-to-date (YTD) amounts (gross, net, taxes, and deductions
A pay stub shows wages earned for that specific pay period (current pay period), as well as year-to-date amounts (YTD). Deductions also appear on your pay stub. In the end, the pay stub reveals your actual take-home pay (net pay) and the amount that will be direct deposited into their account.
What Gets Taken Out of Your Paycheck?
As mentioned, deductions are wages withheld from your total earnings. Deductions are different for every employee, so it is important to keep track of them to ensure your employer is withholding the right amount from your paycheck every pay period.
Deductions found on your pay stub include the following:
Employee tax deductions
These are taxes mandated by government agencies and may include:
- Federal income tax
- State income tax (if applicable)
- Local taxes (if applicable)
- Employee’s portion of FICA tax.
State and local taxes depending on where you live. Not every state has an income tax.
FICA stands for Federal Insurance Contributions Act and is a U.S. federal payroll tax. FICA tax includes a 6.2% Social Security tax and 1.45% Medicare tax on earnings, for a total of 7.65%. In 2021, only the first $142,800 of earnings are subject to the social security tax. Your employer also pays an equivalent amount to the IRS.
Benefits and other deductions
These deductions depend on the extra benefits that the employer provides and what the employee wants to be deducted. These other deductions may include:
- Health insurance
- Insurance premiums
- Retirement plans
- Charitable donations.
How Your Employer Determines Your Deductions and Withholdings
Your employer uses your W-4 form to determine your withholdings and allowances to be deducted from each pay period. You usually fill out a W-4 form when you first start at a new job.
Information that a W-4 may ask you includes:
- Name
- Address
- Social Security Number (SS)
- Filing Status (Single/Married)
- Sign and Date
- Dependants
Your filing status and the number of dependents have the biggest effect on the amount of taxes taken from your paycheck.
Your withholdings may also differ if you have one or more jobs.
Once you fill out your W-4, your employer then uses withholding tables to figure out how much state and federal income tax to withhold.
If you get a significant raise or have a change in marital status, you can change your withholdings or filing status at any time. Just download a blank W-4 form and give it to your employer.
A W-4 form may seem confusing at first, but once you understand which parts of the form apply to you and how to fill them out, it is a much more manageable task. Luckily, most people don’t have to fill out W-4 forms too frequently.
Paying Too Much or Not Enough Tax
Filling out a W-4 helps your employer calculate the amount of tax you owe as accurately as possible. When you fill out your W-4 correctly, you shouldn’t owe any taxes or be owed a significant refund during tax season. However, it does not always work out this way.
If you owe a large amount in taxes, your employer may not be withholding enough from your pay. Fill out a new W-4 to have the right amount deducted and avoid owing anything.
Receiving a large refund may seem like an ideal situation, but it means that you were giving the government a free loan and that you were living on less money than necessary throughout the year, which is another scenario where you should fill out a new W-4 for your employer.
Understanding Your Paycheck
Taxes don’t have to be a mystery, and you don’t have to wait until tax season to take a look at the deductions getting taken from your paychecks.
You must accurately fill out your W-4 form to avoid any surprises come tax season, not only to avoid having to owe the IRS a large sum but to avoid living on less of your paycheque during the year than necessary.
Form Pros makes figuring out your withholding allowances easy. Download your W-4 from our website to fill it out in a matter of minutes. Form Pros also allows you to generate pay stubs with all of the key information you need.