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How Your Paycheck Works: Income Tax Withholding

When you start a new job or get a raise, you’ll agree to either an hourly wage or an annual salary. But calculating your weekly take-home pay isn’t a simple matter of multiplying your hourly wage by the number of hours you’ll work each week, or dividing your annual salary by 52. That’s because your employer withholds taxes from each paycheck, lowering your overall pay. Because of the numerous taxes withheld and the differing rates, it can be tough to figure out how much you’ll take home. That’s where our paycheck calculator comes in.

What exactly is tax withholding? It’s money that comes out of your paycheck in order to pay taxes. The big one is income tax. The federal government collects your income tax payments gradually throughout the year by taking directly from each of your paychecks. It's your employer's responsibility to withhold this money based on the information you provide in your Form W-4. You have to fill out this form and submit it to your employer whenever you start a new job, but you may also need to re-submit it after a major life change, like a marriage.

If you do make any changes, your employer has to update your paychecks to reflect those changes. Most people working for a U.S. employer have federal income taxes withheld from their paychecks, but some people are exempt. To be exempt, you must meet both of the following criteria:

  1. In the previous tax year, you received a refund of all federal income tax withheld from your paycheck because you had zero tax liability.
  2. This year, you expect to receive a refund of all federal income tax withheld because you expect to have zero tax liability again. If you think you qualify for this exemption (for example because your income is quite low), you can indicate this on your W-4 Form.

Federal Top Income Tax Rate

YearRate
202037.00%
201937.00%
201837.00%
201739.60%
201639.60%
201539.60%
201439.60%
201339.60%
201235.00%
201135.00%
201035.00%
200935.00%
200835.00%

When it comes to tax withholding, employees face a trade-off between bigger paychecks and a smaller tax bill. It's important to note that while the 2019 W-4 allowed you to claim allowances, the 2020 version doesn't. Additionally, it removes the option to claim personal and/or dependency exemptions. Instead, filers are required to enter annual dollar amounts for things such as total annual taxable wages, non-wage income and itemized and other deductions. The new version also includes a five-step process for indicating additional income, entering dollar amounts, claiming dependents and entering personal information. While those hired before January 1, 2020, aren't required to complete the form, you may want to do so if you're changing jobs or adjusting your withholding in 2020. One way to manage your tax bill is by adjusting your withholding. The downside to maximizing each paycheck is that you might end up with a bigger tax bill if, come April, you haven't had enough withheld to cover your tax liability for the year. That would mean that instead of getting a tax refund, you would owe money.

If the idea of a big one-off bill from the IRS scares you, then you can err on the side of caution and adjust your withholding. Each of your paychecks may be smaller, but you’re more likely to get a tax refund and less likely to have tax liability when you fill out your tax return.

Of course, if you opt for more withholding and a bigger refund, you're effectively giving the government a loan of the extra money that’s withheld from each paycheck. If you opt for less withholding you could use the extra money from your paychecks throughout the year and actually make money on it, such as through investing or putting it in a high-interest savings account. You could also use that extra money to make extra payments on loans or other debt. 

When you fill out your W-4 there are worksheets that will walk you through the withholding based on your marital status, the number of children you have, the number of jobs you have, your filing status, whether someone else claims you as your dependent, whether you plan to itemize your tax deductions and whether you plan to claim certain tax credits.

You can also fine-tune your tax withholding by requesting a certain dollar amount of additional withholding from each paycheck. You can specify this amount on your W-4.

A financial advisor can help you understand how taxes fit into your overall financial goals. Financial advisors can also help with investing and financial plans, including retirement, homeownership, insurance and more, to make sure you are preparing for the future.

How Your Paycheck Works: FICA Withholding

In addition to income tax withholding, the other main federal component of your paycheck withholding is for FICA taxes. FICA stands for the Federal Insurance Contributions Act. Your FICA taxes are your contribution to the Social Security and Medicare programs that you’ll have access to when you’re a senior. It’s your way of paying into the system.

FICA contributions are shared between the employee and the employer. 6.2% of each of your paychecks is withheld for Social Security taxes and your employer contributes a further 6.2%. However, the 6.2% that you pay only applies to income up to the Social Security tax cap, which for 2020 is $137,700 (up from $132,900 in 2019). Any income you earn above $137,700 doesn’t have Social Security taxes withheld from it. It will still have Medicare taxes withheld, though.

There is no income limit on Medicare taxes. 1.45% of each of your paychecks is withheld for Medicare taxes and your employer contributes a further 1.45%. If you make more than a certain amount, you'll be on the hook for an extra 0.9% in Medicare taxes. Here's a breakdown of these amounts:

  • $200,000 for single filers
  • $250,000 for married taxpayers filing jointly
  • $125,000 for married taxpayers filing separately

2019 - 2020 Income Tax Brackets

Single Filers
Taxable IncomeRate
$0 - $9,70010%
$9,700 - $39,47512%
$39,475 - $84,20022%
$84,200 - $160,72524%
$160,725 - $204,10032%
$204,100 - $510,30035%
$510,300+37%
Married, Filing Jointly
Taxable IncomeRate
$0 - $19,40010%
$19,400 - $78,95012%
$78,950 - $168,40022%
$168,400 - $321,45024%
$321,450 - $408,20032%
$408,200 - $612,35035%
$612,350+37%
Married, Filing Separately
Taxable IncomeRate
$0 - $9,70010%
$9,700 - $39,47512%
$39,475 - $84,20022%
$84,200 - $160,72524%
$160,725 - $204,10032%
$204,100 - $306,17535%
$306,175+37%
Head of Household
Taxable IncomeRate
$0 - $13,85010%
$13,850 - $52,85012%
$52,850 - $84,20022%
$84,200 - $160,70024%
$160,700 - $204,10032%
$204,100 - $510,30035%
$510,300+37%

If you work for yourself, you need to pay the self-employment tax, which is equal to both the employee and employer portions of the FICA taxes (15.3% total). Luckily, when you file your taxes, there is a deduction that allows you to deduct the half of the FICA taxes that your employer would typically pay. The result is that the FICA taxes you pay are still only 6.2% for Social Security and 1.45% for Medicare.

How Your Paycheck Works: Deductions

Federal income tax and FICA tax withholding are mandatory – there’s no way around them unless your earnings are very low. However, they’re not the only factors that count when calculating your paycheck. There are also deductions to consider.

For example, if you pay any amount toward your employer-sponsored health insurance coverage, that amount is deducted from your paycheck. When you enroll in your company’s health plan, you can see the amount that is deducted from each paycheck. If you elect to contribute to a Health Savings Account (HSA) or Flexible Spending Account (FSA) to help with medical expenses, those contributions are deducted from your paychecks too.

Also deducted from your paychecks are any pre-tax retirement contributions you make. These are contributions that you make before any taxes are withheld from your paycheck. The most common pre-tax contributions are for retirement accounts such as a 401(k) or 403(b). So if you elect to save 10% of your income in your company’s 401(k) plan, 10% of your pay will come out of each paycheck. If you increase your contributions, your paychecks will get smaller. However, making pre-tax contributions will also decrease the amount of your pay that is subject to income tax. The money also grows tax-free so that you only pay income tax when you withdraw it, at which point it has (hopefully) grown substantially.

Some deductions from your paycheck are made post-tax. These include Roth 401(k) contributions. The money for these accounts comes out of your wages after income tax has already been applied. The reason to use one of these accounts instead of an account taking pre-tax money is that the money in a Roth IRA or Roth 401(k) grows tax-free and you don’t have to pay income taxes when you withdraw it (since you already paid taxes on the money when it went in). If you are early in your career or expect your income level to be higher in the future, this kind of account could save you on taxes in the long run.

How Your Paycheck Works: Pay Frequency

Some people get monthly paychecks (12 per year), some are paid twice a month on set dates (24 paychecks per year) and others are paid bi-weekly (26 paychecks per year). The frequency of your paychecks will affect their size. The more paychecks you get each year, the smaller each paycheck is, assuming the same salary.

How Your Paycheck Works: Local Factors

If you live in a state or city with income taxes, those taxes will also affect your take-home pay. Just like with your federal income taxes, your employer will withhold part of each of your paychecks to cover state and local taxes.

Federal Paycheck Quick Facts

  • Federal income tax rates range from 0% to a top marginal rate of 37%.
  • The U.S. median household income in 2018 was $60,293.
  • 43 U.S. states impose their own income tax on top of federal income taxes.

Paycheck Calculators by State

Most Paycheck Friendly Places

SmartAsset's interactive map highlights the most paycheck friendly counties across the country. Zoom between states and the national map to see data points for each region, or look specifically at one of the four factors driving our analysis: Semi-Monthly Paycheck, Purchasing Power, Unemployment Rate, and Income Growth.

RankCountySemi-Monthly PaycheckPurchasing PowerUnemployment RateIncome Growth

Methodology Our study aims to find the most paycheck friendly places in the country. These are places in the country with favorable economic conditions where you get to keep more of the money you make. To find these places we considered four different factors: semi-monthly paycheck, purchasing power, unemployment rate and income growth.

First, we calculated the semi-monthly paycheck for a single individual with two personal allowances. We applied relevant deductions and exemptions before calculating income tax withholding. To better compare withholding across counties we assumed a $50,000 annual income. We then indexed the paycheck amount for each county to reflect the counties with the lowest withholding burden.

We then created a purchasing power index for each county. This reflects the counties with the highest ratio of household income to cost of living. We also created an unemployment rate index that shows the counties with the lowest unemployment. For income growth, we calculated the annual growth in median income over five years for each county and indexed the results.

Finally, we calculated the weighted average of the indices to yield an overall paycheck friendliness score. We used a one half weighting for semi-monthly paycheck and a one-sixth weighting for purchasing power, unemployment rate and income growth. We indexed the final number so higher values reflect the most paycheck friendly places.

Sources: SmartAsset, government websites, US Census Bureau 2017 5-Year American Community Survey, MIT Living Wage Study, Bureau of Labor Statistics