5 Taxes that Come Out of Every Paycheck

Understanding Your Tax Withholdings

Read Time: 7 Minutes

Before you can control your taxes, you must 1st understand them. That’s why this article is so important. Most Americans don’t enjoy seeing taxes taken out of their paycheck, but don’t know enough about how taxes work to do anything about it. You likely have questions like:

  • What exactly is each tax?
  • How much does each of these taxes cost me?
  • Where can I find this information on my paycheck?

Today we’ll answer all of these questions. We’ll cover the 5 most common taxes taken out of your paycheck, approximately how much each tax is, and where to find it on your pay stub. I’ll even include an example of my pay stub to help guide you.

Of course, there are exceptions to every tax rule, so your situation may differ. I mean the tax code is literally 1,000’s of pages long. With that said, let’s get to it.

What Are the 5 Main Taxes?

This table shows a summary of the 5 main taxes we will be discussing. And below it is a more detailed explanation of each.

5 Common Taxes Withheld from Paychecks
5 Common Taxes Withheld from Paychecks
1. Federal Income Tax (10% – 39.6%)

This is probably the tax you are most familiar with from watching politicians on TV all the time. Although it has changed throughout the years, the Federal Income Tax has been around since 1913, when the 16th Amendment was ratified.

The US has what’s known as a “progressive tax system,” meaning the higher your income, the more Federal Income Tax you pay. The amount of Federal Income Tax you owe depends primarily on which tax bracket you fall into, and ranges from 10% up to 39.6%. Below are the 2017 tax brackets for the 2 most common filing statuses: single & married filing joint.

2017 Federal Income Tax Brackets
2017 Federal Income Tax Brackets
2. Social Security Tax (6.2%)

This is another Federal tax that funds retirees Social Security checks and is something that won’t be around by the time us millennials finally retire. Joking. Well…kind of.

Cartoon about the instability of the Social Security Program
Cartoon about the instability of the Social Security Program. Source here.

The tax actually dates back to 1935 when the Social Security Act was passed under President Roosevelt as part of The New Deal. Social Security is best known as the money old people get after they retire, but also benefits many others, including those who are disabled or children whose parent dies.

You pay 6.2% of your income towards this tax, but good news. There is a cap called the “Social Security Wage Base.” Any income you earn in excess of the Wage Base is not subject to the 6.2% tax. In 2017, the wage base is $127,200. This number is adjusted each year to keep pace with inflation.

3. Medicare Tax (1.45% – 2.35%)

This is another Federal tax that funds health insurance for the elderly. Medicare was enacted in 1965 under President Johnson as an amendment to the Social Security Act listed above.

1.45% of your paycheck goes towards the Medicare Tax. Unlike the Social Security Tax though, there is no wage cap. So every dollar you earn, no matter how much, is subject to the Medicare Tax. And actually, the story gets worse.

In 2010, The Affordable Care Act (ACA) became law under President Obama. With that, a new Additional Medicare Tax was added. The new tax is an additional 0.9% of income that exceeds $200,000 if single and $250,000 if married. 1.45% + 0.9% means that high earners could be paying 2.35% of some of your income just in Medicare Taxes.

4. State Income Tax (0% – 13.3%)

Unless you live in 1 of the 7 states without an income tax, you’ll also be paying this tax. Each state has their own tax brackets, so your situation will vary. I’ve only lived in California & New York, 2 of the states with the highest income tax rates in the country, so I know the pain of this tax all too well.

The Tax Foundation actually put together a cool little map of each state that is color coded by how high their income taxes are.

State Income Tax Rate Map

5. Misc. State/Local Taxes (varies)

Lastly, we have a “catch-all” category of miscellaneous state/local taxes. Different states and even different cities have various programs that are funded through income taxes.

For example, California, where I used to live, has a State Disability Insurance Program that is funded through a 0.9% income tax. For another example, I now live in New York City, which, in addition to the New York State Income Tax, has its own city tax of between 2.9% – 3.9%, depending on your income.

These miscellaneous taxes will vary greatly depending on where you live, so there’s no way to summarize them all here. I’m just including this category so you aren’t surprised if and when you see them also withheld from your paycheck.

Where Can I Find This Information for My Income?

Now that you know the 5 most common taxes you might see, where can you find this information for yourself? It’s actually super easy. Just look at your pay stub.

Each employer’s pay stub will be laid out slightly differently, and may use slightly different abbreviations, but they all have the same basic information.

Here is mine, as an example. The section highlighted in red is where it lists the taxes that are withheld.

Example pay stub highlighting tax withholding section
Example pay stub highlighting tax withholding section

We can work our way down the list.

  • “FITW” stands for Federal Income Tax Withheld.
  • “Med” is Medicare.
  • “NY” is New York State Income Tax.
  • “NY-NYC1” is New York City Income Tax.
  • “NYSDI-E” is New York State Disability Insurance.
  • Last, but not least, “SS” is obviously Social Security.

Once you have that information, it’s easy to add up all the taxes you pay, and divide that by your gross paycheck amount. That will give you the total percentage that gets withheld from each paycheck.

Mine was a whopping 36.07%. Yup, over ⅓ of the money I earn goes straight to Uncle Sam!

Wrapping It All Up

Most people don’t like paying taxes, but they don’t understand them well enough to do anything about it. This article should lay the groundwork for what are likely the 5 most common taxes that get withheld from your income, and where to find them on your pay stub.

Tell me in the comments below. What percent of your total paycheck do you pay in taxes? Were you surprised by this number? Are you paying any taxes you weren’t even aware of before reading this article?

The conclusions drawn throughout this website are not advice meeting the particular investment needs of any investor, and they are not intended to serve as the basis for financial planning, tax, or investment decisions. This website is for informational purposes only and is not a solicitation or an offer to buy any product, service, security or instrument. The opinions expressed throughout this website are my own and not those of any company I work for.