Understanding Paycheck Deductions in the United States
The most confusing document the average American receives is their bi-weekly pay stub. It is filled with cryptic acronyms, weird percentages, and deductions that seem to eat up a massive portion of your hard-earned salary.
If you don't understand how to read your pay stub, you won't know if your employer is accidentally withholding too much money (or worse, not enough, leaving you with a massive tax bill in April).
Here is a breakdown of the three primary deductions you will see on every standard US paycheck.
1. Federal Income Tax Withholding
The largest deduction on your paycheck is usually for Federal Income Tax.
The United States operates on a "pay-as-you-go" tax system. Instead of waiting until April to send the IRS a massive check, your employer estimates how much you will owe at the end of the year and automatically deducts a portion of it from every paycheck.
The amount they deduct is based entirely on the W-4 Form you filled out when you were hired. If you claim "0" dependents, they will withhold the maximum amount of tax. If you claim multiple dependents, they will withhold less, giving you a larger paycheck today.
2. FICA Taxes (Social Security & Medicare)
Unlike Federal Income Tax (which varies based on your income bracket), FICA taxes are a flat percentage mandated by the Federal Insurance Contributions Act.
Every employee in the US must pay 7.65% of their gross income to fund these two programs:
- Social Security: 6.2%
- Medicare: 1.45%
Bonus Fact: Your employer is legally required to match this contribution. They also pay 7.65% out of their own pocket directly to the government on your behalf. (If you are a freelancer or independent contractor, you have to pay both halves yourself, which is known as the 15.3% Self-Employment Tax!)
3. State and Local Taxes
Depending on where you live, you may see additional deductions for State Income Tax and City/Local Taxes.
If you live in states like Florida, Texas, or Nevada, you will not see a State Income Tax deduction, as those states do not levy one. If you live in California or New York, this deduction will be significant.
Verify Your Check
Never assume your HR department's payroll software is flawless.
If you just got a raise and want to see exactly how much of it will actually hit your bank account after all the new taxes are applied, use our free Paycheck Calculator to run a perfectly accurate estimate!