Learn How to Calculate Taxes From Your Paycheck

Understanding Your Paycheck and Tax Withholding

Your paycheck contains several numbers that might seem confusing at first glance. The most important thing to understand is the difference between your gross pay and your net pay. Gross pay is the total amount of money your employer pays you before any deductions. Net pay, sometimes called take-home pay, is what you actually receive after taxes and other deductions are removed.

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When you start a new job, you fill out a Form W-4, which tells your employer how much federal income tax to withhold from each paycheck. This withholding is not a tax you owe—it's money your employer sets aside on your behalf and sends to the IRS. Most people also have Social Security and Medicare taxes withheld, which are called FICA taxes. These are separate from income tax withholding.

The amount withheld depends on several factors. These include your filing status (single, married, head of household), the number of dependents you claim, and any additional income you earn outside your main job. If you have a spouse who also works, that affects your withholding too. The W-4 form allows you to adjust your withholding based on your personal situation.

Understanding withholding matters because it affects how much money you take home each pay period. If too much is withheld, you'll get a refund when you file your tax return. If too little is withheld, you may owe taxes when you file. Neither situation is ideal—you want your withholding to be as close as possible to your actual tax liability.

Practical takeaway: Review your most recent paycheck stub and identify the gross pay, federal income tax withheld, Social Security tax, Medicare tax, and net pay. Understanding these components is the foundation for calculating your taxes.

Breaking Down Federal Income Tax Withholding

Federal income tax withholding is calculated using tax tables and formulas provided by the IRS. Your employer uses information from your W-4 form along with your gross pay to determine the correct amount to withhold. The calculation takes into account your filing status and the number of allowances or credits you claim on your W-4.

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The IRS updated the W-4 form significantly in 2020, removing the concept of "allowances" and replacing it with a more straightforward approach. Currently, you can claim dependents directly, and you can indicate if you have multiple jobs or a working spouse. You can also enter other income, deductions, or credits that affect your tax situation. This information helps your employer calculate a more accurate withholding amount.

To estimate your federal income tax withholding, you need to know your taxable income. This is your gross income minus the standard deduction for your filing status. For 2024, the standard deduction is $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household. Your taxable income is then subject to the federal tax brackets.

The federal tax system uses progressive tax brackets, meaning different portions of your income are taxed at different rates. For 2024, the federal tax brackets for single filers are 10% on income up to $11,600, 12% on income between $11,600 and $47,150, 22% on income between $47,150 and $100,525, and so on up to 37% on income over $578,100. Your employer's payroll system uses these brackets to calculate how much to withhold from each paycheck.

Practical takeaway: To understand your federal withholding, find your filing status and gross annual income. Subtract the standard deduction to find your taxable income, then multiply by the appropriate tax bracket percentage. This gives you a rough estimate of your total federal tax liability for the year.

Calculating Social Security and Medicare Taxes

Social Security and Medicare taxes, known as FICA taxes, are withheld from your paycheck at fixed rates set by law. These taxes are easier to calculate than federal income tax because they use straightforward percentages with no adjustments for filing status or dependents. In 2024, the Social Security tax rate is 6.2% of your gross wages, and the Medicare tax rate is 1.45% of your gross wages.

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Social Security tax has a wage base limit, which means that once you earn above a certain amount in a year, no additional Social Security tax is withheld. For 2024, the wage base limit is $168,600. This means if you earn $200,000 in a year, Social Security tax is only withheld on the first $168,600. However, Medicare tax has no wage base limit. Once you earn over $200,000 as a single filer (or $250,000 if married filing jointly), an additional 0.9% Medicare tax is withheld on the excess income.

To calculate your FICA withholding, multiply your gross pay by the applicable percentages. For example, if your gross pay is $3,000 and you haven't reached the Social Security wage base limit, your Social Security withholding is $3,000 × 0.062 = $186. Your Medicare withholding is $3,000 × 0.145 = $43.50. Together, FICA withholding is $229.50. These amounts appear on your paycheck stub as "Social Security" and "Medicare" or sometimes as "OASDI" (Old Age, Survivors, and Disability Insurance) and "HI" (Hospital Insurance).

Your employer also pays an equal amount of Social Security and Medicare taxes on your behalf, but this amount doesn't appear on your paycheck. The employee and employer contributions are equal at 6.2% for Social Security and 1.45% for Medicare, making the total FICA tax 15.3% when you combine both sides.

Practical takeaway: To calculate your FICA taxes, multiply your gross pay by 6.2% for Social Security (up to the annual wage limit) and 1.45% for Medicare. Add any additional Medicare tax if your income exceeds the thresholds. These calculations are consistent across all paychecks, making them predictable.

Understanding State and Local Tax Withholding

In addition to federal taxes, most states and some local jurisdictions withhold income tax from your paycheck. State income tax rates vary significantly by location. Some states have no income tax at all, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states have income tax rates ranging from less than 1% to over 13%, depending on your income level.

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State tax withholding is calculated similarly to federal withholding, but each state uses its own tax brackets and rules. When you start a job, you typically fill out a state W-4 form that determines your state withholding. This form asks for your filing status, dependents, and other income, just like the federal W-4. However, the state form may have different options and calculations than the federal form.

Some states use a flat tax rate, meaning everyone pays the same percentage regardless of income. Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, Mississippi, Missouri, North Carolina, and Pennsylvania are examples of flat-tax states. In these states, withholding is straightforward—simply multiply your gross pay by the state tax rate. Other states use progressive tax brackets similar to the federal system, where different income levels are taxed at different rates.

Local taxes present another consideration in some cities and counties. Cities like New York, Philadelphia, and Columbus, Ohio have local income taxes in addition to state taxes. These taxes are typically small, ranging from 1% to 4% of your income, but they add up over time. Your paycheck stub will show all applicable withholdings broken down by type.

To calculate your state and local tax withholding, consult your state's department of revenue website to find current tax rates and brackets for your filing status. Then apply the same process you used for federal income tax: determine your taxable income and apply the appropriate rate or bracket. The total from all jurisdictions—federal, state, and local—represents your total income tax withholding.

Practical takeaway: Identify which states and local jurisdictions tax your income, then find their current tax rates on their official revenue department websites. If you move to a different state during the year, update your W-4