If you take a look at your pay stub, you will most likely find that your gross pay and your net pay differ significantly. Your gross pay is what your employer actually pays you for the job you do, but by the time the federal, state and local governments get done taxing those earnings, you are left with much less.
The United States uses a progressive system for its income taxes, meaning that the workers with the highest incomes pay a higher percentage of their earnings to the federal government than those who earn less. As of 2011, these income tax brackets start at 10 percent for those with very low incomes, and top out at 35 percent for those with the highest earnings.
Social Security Taxes
Payroll taxes are used to support the Social Security system that makes monthly payments to senior citizens and the disabled. Unlike the progressive income tax, the payroll tax is the same percentage for all workers regardless of income level. The normal tax rate for Social Security is 6.2 percent of earnings, but for 2011 only that rate has been reduced to 4.2 percent. This payroll tax reduction was part of the tax deal worked out by President Barack Obama and Congress in late 2010. Unless Congress extends the tax cut, the Social Security tax rate is slated to go back up to 6.2 percent on January 1, 2012. This tax applies only to the first $106,800 in earnings, with income above that level exempt from the levy.
Medicare is also supported by a payroll tax, and the Medicare tax also uses a flat rate. As of 2011, the Medicare tax is set at 1.45 percent of earnings. Unlike the Social Security tax, which tops out at $106,800 in earnings, there is no cap on the Medicare tax, meaning that workers pay a flat 1.45 percent of their earnings no matter how much or how little they make.
State and Local
In addition to the taxes imposed by the federal government, workers are subject to taxes at the state and local level. While a handful of states impose no taxes on earnings, the vast majority do. These states tax income at different rates, with some using a flat rate for everyone and others using a tiered tax rate in which those with higher incomes pay a higher percentage of their incomes to the state. The municipality where you live may also impose a tax on your income. You can find these taxes listed as state and local on your pay stub.