The Internal Revenue Service requires your employer to take money out of your check every payday to pay your taxes. The purpose is simple: Payroll tax deductions mean you pay most of your taxes as you go so that you do not receive a huge bill when it comes time to file your taxes. Most states and some municipalities also levy income taxes and require payroll deductions. If you live in one state and work in another, notify your employer, so that it deducts the correct taxes. If you are self-employed, you do not have an employer who takes taxes out of your paycheck. Instead, you must pay estimated taxes yourself each quarter.
How much money gets taken from your paycheck depends on your filing status, income and any allowances. You can expect to pay FICA taxes of 6.2 percent and 1.45 percent along with federal income taxes ranging from 10 to 37 percent of your taxable income.
Factors That Affect Tax Rates
The money your employer takes out of your check is an estimate of how much taxes you owe on your earnings for the pay period. Your earnings determine the size of your payroll tax deductions. Your tax filing status and the number of withholding allowances you claim on your W-4 form also affect your payroll deductions.
The Federal Insurance Contributions Act (FICA) calls for Social Security and Medicare taxes. These taxes are calculated based on a percentage of your gross pay – your earnings before any deductions – and the percentage varies. For the year 2018, the Social Security tax rate is 6.2 percent, and the Medicare rate is 1.45 percent. In addition, there is a $128,400 income cap on the Social Security Tax. If your year-to-date earnings exceed the cap, your employer stops taking out the retirement tax, but must continue taking out Medicare tax, for which there is no cap.
Your employer calculates and deducts federal income tax based on your taxable income for the pay period. Taxable income is the amount left over after you subtract withholding allowances from your gross pay. For example, in 2018, one withholding allowance equals $79.80 for employees paid weekly. If you claimed two withholding allowances on your W-4, your employer would have subtracted $159.60 from your gross pay to determine your taxable income. You also may have other deductions that reduce your taxable income, such as contributions to tax-deferred retirement plans.
Your Federal Income Tax
The amount your employer deducts from your check for federal income tax is based on your filing status and the amount of money you make. For example, in 2018, suppose you were single and earning $9,000 per year. You would be taxed 10 percent or $900, which averages out to $17.31 out of each weekly paycheck. Individuals who make up to $38,700 fall in the 12 percent tax bracket, while those making $82,500 per year have to pay 22 percent. There are also 24, 32, 35 and 37 percent tax brackets.
As of publication, the 37 percent tax bracket applies to yearly earnings of $500,001 and higher. That means if you were a single individual and you made $600,000 for the year, you'll have $3,583.14 taken out of your $11,538.46 weekly paycheck.
Options to Consider
Many people earn income from investments or a second job and can end up owing the IRS at tax time. To prevent this from happening, consider claiming fewer withholding exemptions even if you are entitled to them. This increases the amount of tax withheld. You also can file a new W-4 form requesting that your employer withhold extra money each payday.
- U.S. Social Security Administration: OASDI and SSI Program Rates and Limits, 2013
- IRS.gov: Publication 15: 2018 Employer’s Tax Guide
- IRS.gov: Form W-4
- U.S. Social Security Administration: 2018 Social Security Changes
- IRS.gov: Notice 1036
- T. Rowe Price: IRS Tax Rate Schedules
- Internal Revenue Service. "About Form W-4, Employee's Withholding Certificate." Accessed Feb. 3, 2020.
- Internal Revenue Service. "W-4 Employee's Withholding Certificate," Page 1. Accessed Jan. 20, 2020.
- Internal Revenue Service. "Topic No. 306 Penalty for Underpayment of Estimated Tax." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Topic No. 753 Form W-4 – Employee's Withholding Allowance Certificate." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Form W-4 (2019)," Page 1. Accessed Jan. 20, 2020.
- Internal Revenue Service. "W-4 Employee's Withholding Certificate," Pages 1-4. Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 505 (2019), Tax Withholding and Estimated Tax." Accessed Jan. 20, 2020.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.