What comes out of your paycheck, and why

Your paycheck is smaller than your salary because federal and state governments, and sometimes your city, take money directly from each payment before you see it. This is called withholding. The amount withheld depends on what you earn, how often you're paid, what you claimed on your W-4 form when you started the job, and where you live.

The money taken out falls into two separate categories. Income tax withholding goes to the IRS and your state tax agency — this is money toward your annual tax bill. FICA withholding (Social Security and Medicare) goes to those programs directly and is calculated the same way for almost everyone. Some states also withhold for state income tax, and a few cities withhold for local tax.

You are not losing this money. It is being held by the government on your behalf. When you file your tax return in April, the IRS compares what was withheld to what you actually owe. If too much was taken, you get a refund. If too little was taken, you owe the difference.

Key Takeaways

  • Federal income tax withholding, state income tax withholding, Social Security tax (6.2%), and Medicare tax (1.45%) are the main deductions from most paychecks.
  • The amount of federal income tax withheld depends on your W-4 form, which you fill out when you start a job and can change anytime.
  • FICA taxes (Social Security and Medicare) are withheld at a fixed rate regardless of your W-4 choices.
  • Your employer also pays matching FICA taxes on your behalf, but this does not appear on your paycheck.
  • Withholding is not a tax you pay twice — it is money held toward your annual tax bill, which you settle when you file your return.

Federal income tax withholding and your W-4

The amount of federal income tax taken from each paycheck is based on the W-4 form you completed when you started your job. This form tells your employer how much to withhold. The more you claim on your W-4, the less your employer withholds. The fewer you claim, the more is withheld.

Your W-4 asks you to claim dependents, account for a second job or spouse's income, and note any other income sources. These claims reduce your withholding because they lower your taxable income. If you claim zero dependents and have no other income, your employer withholds more aggressively — this usually results in a refund when you file.

You can change your W-4 anytime by giving your employer a new form. If you are getting a large refund every year, you could reduce your claims to bring home more money each paycheck. If you owe money at tax time, you could increase your claims to reduce withholding. The IRS provides a W-4 calculator on its website to help you estimate the right number of claims.

Social Security and Medicare taxes (FICA)

FICA stands for Federal Insurance Contributions Act. It funds Social Security and Medicare. Unlike income tax withholding, FICA is withheld at a fixed rate that does not change based on your W-4 or personal situation.

Social Security tax is 6.2% of your gross pay, up to a wage cap that changes each year. In 2024, you stop paying Social Security tax once you earn $168,600 in a calendar year. Medicare tax is 1.45% of all your gross pay with no cap. If you earn over $200,000 as a single filer (or $250,000 married filing jointly), an additional 0.9% Medicare tax is withheld.

Your employer also pays an equal amount of FICA tax — 6.2% for Social Security and 1.45% for Medicare — but this is not deducted from your paycheck. It is a separate cost to your employer. When you are self-employed, you pay both the employee and employer portions, which is why self-employment tax is higher than FICA withholding on a W-2 paycheck.

State and local income tax withholding

Most states with an income tax withhold state income tax from your paycheck. The rate and rules vary widely by state. Some states have a flat tax rate; others use brackets like the federal system. A few states have no income tax at all — currently Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not withhold state income tax.

Some cities also withhold local income tax. New York City, Philadelphia, and Columbus, Ohio are examples. Local tax is usually a small percentage and is withheld in addition to federal and state withholding. You will see it listed separately on your pay stub.

State and local withholding works the same way as federal withholding: money is held toward your state or local tax bill, and you settle the actual amount owed when you file your state or local return. If you move to a different state mid-year, you may need to file returns in both states.

Other deductions that are not taxes

Your paycheck may also show deductions that are not taxes. These include health insurance premiums, retirement plan contributions (like a 401(k)), flexible spending account contributions, and union dues. These are taken out before or after taxes depending on the type.

Pre-tax deductions like health insurance and traditional 401(k) contributions reduce your taxable income, which lowers your income tax withholding. Post-tax deductions like Roth 401(k) contributions and most union dues do not reduce your taxable income. Your pay stub should label each deduction so you know which is which.

How to read your pay stub

Your pay stub shows your gross pay (before any deductions), each deduction listed separately, and your net pay (what you actually receive). Federal withholding is usually labeled "FIT" or "Federal Income Tax". State withholding is labeled with your state abbreviation. Social Security appears as "FICA-SS" or "Social Security", and Medicare as "FICA-Med" or "Medicare".

Compare your pay stub to your W-4 if the withholding seems wrong. If you claimed dependents but see very little federal withholding, your claims may be too high. If you claimed zero dependents and see a large amount withheld, your claims may be too low. You can also use the IRS W-4 calculator to check whether your current withholding will result in a refund or a bill at tax time.

Why withholding amounts change

Your withholding can change even if you do not change your W-4. If you get a raise, your gross pay increases, so the same withholding percentage results in more dollars taken out. If you work overtime or receive a bonus, that payment is usually withheld at a higher rate — sometimes 22% or 37% federal withholding — because your employer assumes it is a one-time payment.

If you have two jobs, each employer withholds based only on the income from that job, not your total income. This can result in under-withholding if your combined income pushes you into a higher tax bracket. You can adjust your W-4 at one or both jobs to increase withholding and avoid owing money at tax time.

Frequently Asked Questions

Why do I get a refund if taxes were already taken out?

Withholding is an estimate. Your employer calculates it based on your W-4, but the actual tax you owe depends on your full year of income, deductions, and credits. If your employer withheld more than you owe, the IRS returns the difference as a refund. If you withheld too little, you owe the difference when you file.

Can I stop taxes from being taken out of my paycheck?

No. Federal income tax, Social Security, and Medicare withholding are required by law. You cannot opt out. You can only adjust how much is withheld by changing your W-4 or by reporting additional income sources to your employer. If you owe taxes and do not have enough withheld, the IRS can penalize you.

What happens if my employer withholds the wrong amount?

If your employer withholds too much, you will receive a refund when you file your tax return. If too little is withheld, you will owe money. You can also file an amended W-4 with your employer anytime to correct the withholding going forward. Keep copies of any W-4 forms you submit.

Do I pay FICA taxes on all my income?

Social Security tax stops once you reach the wage cap for the year, but Medicare tax continues on all income with no cap. If you have multiple jobs, each employer withholds FICA separately, so you could pay more than the cap if your combined income exceeds it. You can claim the overpayment on your tax return.

Why is my paycheck lower after I got a raise?

A raise increases your gross pay, which increases the dollar amount of withholding. If your raise moved you into a higher tax bracket, your withholding rate may also increase. Your net pay (take-home) still goes up, but not by the full amount of the raise because more taxes are withheld.