Get Your Free Paycheck Deduction Information Guide

Types of Paycheck Deductions

Your paycheck contains two main categories of deductions: those required by law and those you choose to participate in. Understanding the difference between these categories helps you see where your money goes and why your take-home pay is less than your gross salary.

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Mandatory deductions are amounts your employer must withhold from your paycheck by federal law. Federal income tax withholding is the largest mandatory deduction for most workers. This amount is calculated based on information you provide on your W-4 form, which you complete when you start a job. Social Security tax is another mandatory deduction, currently set at 6.2% of your wages up to a certain annual limit (in 2024, that limit is $168,600). Medicare tax is also required, taking 1.45% of all your wages with no upper limit. Combined, Social Security and Medicare are often called FICA taxes, which stands for Federal Insurance Contributions Act.

Beyond federal requirements, many states and some local governments require income tax withholding as well. Depending on where you live and work, you may see state income tax, city taxes, or county taxes deducted from your paycheck. A few states have no state income tax at all, while others tax wages at rates ranging from under 1% to over 13%.

Voluntary deductions are amounts you choose to have withheld, typically to pay for benefits or save for the future. Common voluntary deductions include health insurance premiums for medical, dental, and vision coverage; contributions to retirement accounts like 401(k) plans or 403(b) plans; contributions to flexible spending accounts (FSAs) for healthcare or dependent care expenses; life insurance premiums; disability insurance; and union dues for unionized workers. Some employers also offer voluntary deductions for things like employee stock purchase plans, charitable giving programs, or parking fees.

Practical Takeaway: Review your pay stub each pay period to identify which deductions are mandatory (you cannot avoid them) and which are voluntary (you chose them). This awareness helps you understand your net pay and spot any changes or errors in deductions.

Federal Income Tax Withholding

Federal income tax withholding is the process by which your employer sends a portion of your wages directly to the IRS on your behalf. This system was created during World War II to collect taxes throughout the year rather than requiring one large payment at tax time. The amount withheld depends on several factors related to your personal tax situation, all reported on a W-4 form.

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Your W-4 form asks for basic information: your filing status (single, married filing jointly, married filing separately, or head of household), the number of dependents you claim, and whether you have additional income from sources other than your job. The form also includes a worksheet where you can account for multiple jobs, a working spouse, or dependents. Based on this information, your employer uses IRS tables to calculate how much federal tax to withhold from each paycheck.

The IRS publishes withholding tables that are updated annually to reflect tax law changes and inflation adjustments. These tables ensure that, on average, the amount withheld throughout the year roughly matches what you'll owe when you file your tax return. However, the system is not perfect, and many people find they either owe money or receive a refund when they file.

Your federal withholding may need to change during the year for several reasons. If you get married, your filing status changes, and you may want to adjust your withholding. If you have a baby or adopt a child, you gain a dependent and may have less withheld. If you take a second job, your combined income from both jobs might push you into a higher tax bracket, meaning more should be withheld. Similarly, if you lose a job or reduce your hours, you might want to increase your withholding from your remaining job to avoid underpayment. You can submit a new W-4 to your employer anytime your situation changes.

The IRS provides an online withholding calculator on its website (irs.gov) to help you determine if your current withholding is correct. This tool asks questions about your income, filing status, and tax credits, then tells you whether you should adjust your W-4. Many people find they've been over-withheld (meaning the government has been holding too much of their money) or under-withheld (meaning they haven't set aside enough for taxes).

Practical Takeaway: Check your federal withholding at least once a year, especially after major life changes. Use the IRS withholding calculator to ensure your W-4 reflects your current situation, helping you avoid a large tax bill or unclaimed refund.

State and Local Tax Deductions

While federal income tax withholding applies to all working Americans, state and local income taxes vary dramatically depending on where you work and where you live. Some states impose no income tax at all, while others tax wages at rates comparable to federal taxes. Understanding your state and local tax obligations helps explain variations in take-home pay between workers earning similar gross amounts in different locations.

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Currently, nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (though New Hampshire taxes only investment income). These states rely on sales taxes, property taxes, and other revenue sources instead. The remaining 41 states and the District of Columbia impose state income tax on wages. State income tax rates range from less than 1% to over 13%, with most states falling between 3% and 9%. Some states use a flat tax rate that applies to all income levels, while others use a progressive system with multiple tax brackets so higher earners pay higher rates.

Like federal withholding, state income tax withholding is calculated based on information you provide. Many states have their own withholding forms (sometimes called a state W-4 or equivalent) that you complete when starting a job. Your employer withholds the specified amount from each paycheck and sends it to your state's revenue department. The calculations generally follow the same logic as federal withholding: more dependents or adjustments typically mean less withheld, while claiming no dependents results in more withheld.

Local taxes add another layer in certain cities and counties. A handful of major cities, including New York City, Philadelphia, and Washington D.C., impose local income taxes on residents and people who work within city limits. Local tax rates are typically modest—usually between 1% and 3%—but they are withheld just like state and federal taxes. Some local taxes apply only to residents, while others apply to anyone earning income within that jurisdiction. If you work in a city or county with a local income tax but live elsewhere, you may have local tax withheld but then claim a credit when you file that locality's tax return.

Your state and local tax withholding may change if you move to a different state or locality, change jobs between states, or modify your state W-4 information. Just as with federal withholding, you can adjust your state withholding by submitting a new form to your employer. Additionally, if you have multiple jobs, one in a high-tax state and one in a no-tax state, coordinating your withholding across both employers becomes important to avoid either overpaying or underpaying state taxes.

Practical Takeaway: Determine your state and local tax rates by checking your state's revenue department website or asking your employer's payroll department. If you've recently moved or changed jobs, update your state withholding form to ensure the correct amount is being withheld from your paycheck.

Reading Your Pay Stub

Your pay stub, also called a paycheck stub or earnings statement, is a document your employer provides showing how much you earned and what was deducted during a pay period. Learning to read this document gives you clear visibility into how your gross pay becomes your net pay—the amount actually deposited in your bank account. Pay stubs may be printed or digital, depending on your employer's practices.

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The pay stub typically begins with identifying information: your name, employee ID number, and the pay period dates (such as "January 1 through January 15, 2024"). Below that, you'll see your gross pay, which is the total amount you earned before any deductions. If you're paid hourly, gross pay is calculated by multiplying your hourly rate by the number of hours worked. If you're salaried, gross pay is usually one-half of your annual salary for a semi-monthly pay period, or one-twenty-sixth of