Understand Payroll Taxes & Paycheck Deductions

It’s important to understand the details of our paychecks and paystubs – what are our paycheck deductions. Not just the gross amount we get paid, but the taxes and deductions that get taken out.

Most Americans today get a pdf version of a paystub. On it you can see the different hours you worked (or didn’t), broken down by categories. Common titles include: regular, overtime, holiday, vacation, sick and personal.

The total made between these hours is the gross pay, in other words the amount you earn before taxes and deductions. It’s the number often listed on a job posting as the amount made, say $15/hour or $30,000 a year.

Often some money will be deducted from your gross pay to go into your retirement account and toward health insurance. (Many Americans get health insurance through their employer, but have to pay a portion of the premium. Much more on health insurance.)

If you don’t get health insurance through your job, either it won’t be on the sheet or the line will say $0.

Then, we have taxes. The largest is the federal income tax. More on how that works.

Then we have FICA a.ka. Medicare and/or Social Security taxes.

These taxes are charged to working people to pay for Medicare and Social Security. Those are federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

They are sometimes known as payroll taxes. They are charged on all working income, regardless of how much money you make.They are not charged on passive income from investments like stocks or bonds. There are some exceptions, but they are rare. 

FICA is different than income tax. Social security and medicare taxes do not follow the tax bracketing system that applies to federal income taxes.

Nearly everybody pays a 7.65% tax to FICA. Your employer pays a matching tax, but you don’t see that on any of your tax paperwork. It’s just a cost to them.

Lastly, we have the local income taxes. Most states charge income tax – this can either be the state where you work or the state where you live. You don’t pay them to both states, but if one state charges income tax and the other doesn’t, you’ll owe the income tax to the state that charges it. Double taxation is not allowed.

Your local government – either where you work or where you live – may charge a municipal tax. This is common in big cities, like New York, and old industrial cities like Akron, Ohio . Residents pay a local income tax. Non-residents are not directly taxed, but sometimes their employers pay a tax to the city for employing non-residents.

Your state or local government may break down the income tax to show what it goes for, so it would appear on multiple lines.

Have any specific questions about what’s on your paystub? We’re happy to provide more detail.