How much do you get taxed on paycheck

If you're making money, chances are you'll have to pay taxes on it. In fact, Uncle Sam takes a decent-sized chunk of your paycheck before it even hits your bank account. Before you sign a lease or nail down your budget, you’ll need to figure out your "take-home pay," or the amount of your hard-earned money that will actually end up in your pocket.

In this article, we’ll answer two questions: How much can you expect to pay in taxes, and just what is that tax money used for?

How Much Money Gets Taken Out of Your Paycheck?

Let’s say you got a new job that pays $20/hour. That works out to $800 per week, $3,200 per month, and $41,600 per year--pretax. How much of that can you expect to take home after taxes?

Where Does All That Money Go?

Federal income tax is the government’s biggest source of revenue. It is used to pay the country’s ongoing expenses, such as national defense, infrastructure needs, social assistance programs, and paying interest on the national debt.

Many people are surprised to learn that all of the income you make is not taxed at one rate. Let’s say you are the single filer in the example above, earning $41,600 per year. Your income falls into the 22% tax bracket. But, if you paid a flat 22% tax rate, you'd owe $9,152. Yikes. What gives?

Federal income taxes are paid in tiers. For a single filer, the first $9,875 you earn is taxed at 10%. The next $30,249 you earn--the amount from $9,876 to $40,125--is taxed at 15%. Only the very last $1,475 you earned would be taxed at the 22% rate. This IRS Tax Table can help you figure out how much federal income tax you owe.

What Is FICA?

Social Security and Medicare withholding are also known as FICA. You pay 6.2% of your salary up to the Social Security wage cap, which is $142,800 for 2021, and 1.45% in taxes for Medicare (note that there is no wage cap for Medicare tax). When you work for a corporation, these taxes are matched by your employer, for a total tax paid of 12.4% of salary up to the Social Security wage cap and 2.9% Medicare tax. When you're self-employed, you pay both halves yourself. Also, if your yearly salary is $200,000 or more, you will have to pay an additional 0.9% in Medicare tax.

Social Security is a U.S. government program that provides federal aid to Americans. It includes many federal aid programs: unemployment assistance, disability assistance, Medicaid, and so on. One of the largest Social Security programs is retirement benefits. For many Americans, retirement benefits are a crucial piece of their retirement income.

Eligibility for retirement assistance through Social Security involves accumulating 40 Social Security Credits. Because four credits can be earned in most every year, Americans will need to work for at least 10 years to be eligible. Social Security benefits include survivor benefits. If the immediate beneficiary passes away, eligible family members may receive the benefits in their place.

• Those who have no money deducted from their income for taxes — such as the self-employed — can encounter problems when it's time to file their income tax returns.
• One common problem when you’re filing taxes as self-employed is a surprising and substantial tax bill at tax time, especially if you’re unprepared and unable to pay the amount in full.

The government established the system of payroll withholding to help prevent these kinds of surprises, lower the likelihood of unpaid tax liabilities, and to ensure a steady flow of money to the U.S. Treasury 

Here’s an overview of the percentage of your paycheck withheld for federal taxes, why so much comes out of your pay, where that money goes, and what can be done to change the deducted amount.

Federal deductions

The largest withholding is usually for federal income tax. The amount taken out is based on your gross income, your W-4 Form that describes your tax situation for your employer, and a variety of other factors. Other federal deductions pay for Social Security and Medicare, which are part of the federal benefit and health care systems for the aged and other groups. 

• The Social Security tax is 6.2% of wages for the employee and the same for the employer. 
• Social Security tax is not collected on income in excess of a certain level, which was most recently set to $147,000 in 2022. 
• The Medicare tax rate is set to 1.45% on all wages.
• The additional Medicare tax of 0.9% is withheld on annual wages in excess of $200,000.

State and local payroll deductions

Forty-one states have income taxes and while some have flat-rate deductions, others base certain taxes according to a table.

• Localities within 17 states levy taxes that are automatically withheld from wages.
• Some such local taxes are in flat dollar amounts, some are calculated as a percentage of income to withhold, and others use IRS-like tables.
• In six states and U.S. territories, employees pay disability taxes.
• Three states have unemployment insurance taxes.
• One state has a workers' compensation tax.

How to change your take-home pay

If you're wondering what percentage of your paycheck is withheld for federal income tax and how you can adjust it — it all comes down to Form W-4. To calculate how much you should take out of each paycheck, use a W-4 Withholding Calculator and try a few different tax scenarios to find what works best for you.

The new format for the W-4 form introduced in 2020 allows you to indicate how much money you earn from additional jobs or how much your spouse makes to set accurate withholding levels. 

• Additionally, you can adjust for child tax credits, credits for other dependents, and any other relevant tax deductions you plan to take in excess of the standard deduction.
• By claiming more deductions or tax credits for children and other dependents, you will lower the amount withheld from your check for federal income tax.

You may be able to simply ask for an additional specific dollar amount to be withheld. The W-4 comes with a worksheet to help you calculate the amount you want to have taken out.

• If you enjoy the thrill of a large refund, don't claim any extra deductions or make adjustments for other credits. 
• Conversely, the more credits and deductions that you specify, the larger your regular paycheck will be — and the lower your refund will be. 

Most tax experts advise you not to go for a large refund because that, in effect, means you're giving the government an interest-free loan. Financial advisors typically recommend that you should maximize your paychecks and invest the extra money throughout the year.

Non-governmental paycheck deductions

Non-governmental deductions from your paycheck might reduce your take-home pay, but they can improve your overall tax situation. If you’re an employee and you participate in qualified employer-sponsored retirement programs, for example, the amount of your contributions can usually reduce your taxable wages.

• Participation in medical, dental, and dependent care plans may also reduce your tax burden. 
• In some cases, depending on how the company structures its benefits, even certain expenses may be deducted from your pay and reduce your taxable income.

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