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How Much Of Your Paycheck Do You Actually Pay In Taxes?

It’s a familiar sight on your paycheck stub: the list of tax deductions that take your earnings from ‘gross’ to ‘net.’ Federal income taxes. State and local taxes. FICA contributions for Social Security and Medicare. But these automatic deductions don’t just magically appear out of nowhere; the amounts are specifically calculated based on several factors.

You might be surprised to know how tax deductions are calculated – and how you can get the highest possible amount of your money back when it’s time to file your taxes.

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Federal Income Tax Withholding

When you start a job you’re usually asked to complete a Form W-4, also known as Employee’s Withholding Certificate. This form provides financial information that allows your employer to deduct the correct amount of federal income tax from every paycheck you receive.

Tax deductions are based on your income and your W-4 information, such as the number of dependents you claim and whether you file as a single or married person. Calculating tax deductions also takes into account your income and the corresponding tax bracket. Because the United States operates under a progressive tax system, different income levels are taxed at different rates:  The lower your income, the less you’ll be taxed.

If too little federal tax is withheld from your paycheck, you could end up owing the Internal Revenue Service (IRS) money at the end of the year, which might come with a penalty, depending on the amount you owe. The other side of the coin:  If too much money has been deducted from your paycheck, the government will owe you a tax refund.

Form W-4 information should be updated throughout the term of your employment to reflect significant life changes such as adding a spouse or a child to your deductions, or securing a raise. You’ll want to make sure that your W-4 is updated so that your paycheck deductions correspond accordingly.

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Federal Insurance Contribution Act (FICA)

In essence, FICA is about the future:  FICA tax contributions are made by you and matched by your employer to support the Social Security and Medicare programs that you most likely will take advantage of during your senior years.

As of 2020, 6.2% of your earnings is deducted from each of your paychecks for Social Security taxes. You pay the tax on only the first $137,700 of your earnings; income exceeding that amount will not be taxed. Medicare taxes total 1.45% of each paycheck, but unlike Social Security, Medicare is fully taxed on all of your income. Earnings that exceed $200,000 are taxed at an additional 0.9%.

In general, FICA contributions are mandatory, although there are a few exceptions. If you’re a foreign government employee, an American citizen not earning money in the U.S., a student working for a school where you’re enrolled, or a member of certain religious sects, you may be exempt from paying FICA. Check with a tax professional if you have questions regarding your exemption eligibility.

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Other Paycheck Deductions

If you’re deducing that paycheck deductions only pertain to federal income tax withholding and FICA, think again:  You might be subject to additional deductions such as contributions to a company health insurance plan, and state and local taxes.

Depending on the benefits offered by your employer, you might also opt to have a portion of each paycheck diverted into pre-tax retirement savings account such as a traditional IRA, a 403(b), or a 401(k). Contributions to these types of accounts will reduce the amount of money you see in your paycheck, but because you’ve reduced your taxable income you can expect to see a decrease in the amount of taxes you owe at the end of the year.