The Taxes That Come out of Your Paycheck
Your take-home pay is often less than expected due to several payroll tax withholdings you need to know.


Have you ever looked at your paycheck and wondered where all your hard-earned money goes? If you are like most people, you’ve seen that your take-home pay is often significantly less than what you would expect, given your gross salary.
That’s because several withholdings, including federal income tax, state income tax, Social Security tax, and Medicare tax, come from paychecks. It’s no wonder payroll deductions are confusing for many employees.
So, let's dive into key taxes that seem to eat away at your earnings.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Payroll tax: Withholdings you can’t ignore
Federal law requires employers to withhold employment taxes from employee pay. Employment taxes include federal income tax withholding and taxes for Social Security and Medicare.
But when it comes to all the taxes deducted from your pay, four main types affect most U.S. workers. Here’s a brief summary of each.
1. Federal tax withholding
First is federal income tax withholding, which the government uses to fund everything from national defense to public education. Ultimately, the total federal tax you pay each year depends on several factors, including your taxable income, filing status, and tax bracket.
- The W-4 form you fill out when you start your job helps your employer determine how much to withhold for federal taxes.
- It’s important to update your W-4 and adjust your withholding if needed when you experience significant life changes that could affect your tax situation, like getting married, having a child, or a second job. Other examples might include starting a business or receiving a large bonus or pay increase.
- Filling out the W-4 form incorrectly or failing to update it after major life changes can result in inaccurate withholding.
For example, some people withhold too much from their paychecks, resulting in large tax refunds. However, a big tax refund often means giving the government an interest-free loan.
Meanwhile, other people don’t withhold enough, which can lead to owing tax when tax season rolls around and, in some cases, potentially facing IRS underpayment penalties. That is why the IRS and others often recommend evaluating and adjusting your withholdings throughout the year. A tool on the IRS website can help you estimate your federal tax withholding.
2. State tax withholding
Next, there is state income tax. The amount of state income tax deducted from your pay varies depending on where you live and work.
- Some states, like Florida and Texas, don't have state income tax. Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming also don’t have personal income tax. Other states, like California and New York, for example, are known for higher state income tax rates.
- Several states are cutting income taxes for 2024. For example, as Kiplinger reported, Georgia has a new personal income tax rate designed to offer tax relief for its residents.
- Other states may have other mandatory payroll taxes. Washington state has a first-of-its-kind payroll tax to help residents cover long-term care expenses.
It’s important to remember that state income taxes provide revenue for state governments to fund essential public services and programs. These taxes allow states to invest in education, infrastructure, and other critical areas.
3. Social Security tax: Who pays FICA taxes?
Social Security is a confusing tax for some. It is part of what's known as FICA (Federal Insurance Contributions Act) taxes. Social Security taxes are collected to provide retirement, disability, and health benefits for eligible older adults. Both employees and employers pay Social Security taxes, each contributing an equal share.
- Employees pay 6.2% of their wages into this system up to a specific limit. The 2024 Social Security tax limit is $168,600.
- Self-employed individuals pay both the employee and employer portions of Social Security tax. However, half of the tax is deductible on federal returns if you're self-employed.
Some people think of the Social Security tax as mandatory retirement savings. (The system operates on a pay-as-you-go basis, with current workers' contributions supporting current beneficiaries while building credit toward their future benefits.) However, it should be noted that whether Social Security will remain solvent for future generations is a topic of ongoing debate. Some economists have suggested eliminating 401(k)s to help shore up Social Security.
Note: It’s also important for retirees and older adults to know that once they receive benefits, up to 85% could be subject to tax. For more information, see Taxes on Social Security: Five Things to Know.
4. Medicare tax
Then, there is the Medicare tax. The Medicare payroll tax funds the Medicare program, which provides health insurance for older adults over 65 and certain people with disabilities.
- Medicare taxes are part of FICA and are automatically deducted from employees' paychecks.
- Both employers and employees contribute to this tax, which is 2.9% of earned income and wages (1.45% paid by each).
- Unlike the Social Security tax, however, there is no income limit for Medicare tax, meaning all earned income and wages are subject to this tax. As mentioned, self-employed individuals pay 15.3% in self-employment taxes (12.4% Social Security, 2.9% Medicare) on net earnings.
Note: High-income earners may face two Medicare surtaxes. One is the 0.9% Additional Medicare Tax on earned income above $200,000 ($250,000 for married couples filing jointly). The other is a 3.8% Net Investment Income Tax (NIIT) on certain net investment income of individuals, estates and trusts above statutory threshold amounts. Both surtaxes are paid by the individual, with no employer contribution.
Voluntary deductions
While those four taxes are the main types taken from your paycheck, they are not the only payroll deductions affecting your take-home pay.
Many of us also have voluntary deductions from our pay for things like health insurance premiums, retirement contributions (like 401(k) plans), and sometimes even union dues. While these aren't taxes, they still impact how much money you earn at work ends up in your bank account.
Taxes out of paycheck: Bottom line
Payroll tax deductions can be frustrating, but understanding how they work is essential in managing your finances. Additionally, it may help to consider your voluntary paycheck deductions as investments in your health and future financial security.
Still, it’s good to monitor your federal tax withholdings and always check your paycheck details to ensure your gross pay, paid time off and sick leave balances, and other key information are correct.
Related
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
-
Structured Installment Sales: a Tax-Efficient Way to Sell a Business or Real Estate
SPONSORED Find out how structured installment sales can help sellers defer taxes while generating guaranteed retirement income.
-
Markets Prepare for August Inflation Data: Stock Market Today
Apple CEO Tim Cook is still important, but price action this week is as much about incoming inflation data ahead of next week's Fed meeting.
-
Cruise Lines Sue to Block Hawaii’s New Climate Tourism Tax
State Tax Your vacation to the Aloha State could come at a higher price tag next year. Here’s why.
-
21 Last-Minute Gifts for Grandparents Day 2025 to Give Right Now
Holiday Tips Last-minute gifting is never easy. But here are some ideas to celebrate Grandparents Day.
-
New $6,000 'Senior Bonus' Deduction: What It Means for Taxpayers Age 65-Plus
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
Claiming the Standard Deduction? Here Are Ten Tax Breaks For Middle-Class Families in 2025
Tax Breaks Working middle-income Americans won’t need to itemize to claim these tax deductions and credits — if you qualify.
-
Over Age 65? New $6,000 'Senior Bonus' Deduction Is Available Even If You Itemize
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
Stay NJ Could Give You $6,500: The Deadline You Can't Miss
Property Taxes New Jersey has a new property tax relief program for 2025. The application deadline is approaching fast.
-
The Fall Garden Tax? What to Plant and How to Prepare
Tax Tips Fall gardening could increase your taxes this season. Here’s what to know while planting in 2025.
-
Texas Sales Tax-Free Weekend 2025
Tax Holiday Here's what you needed to know about the Texas sales tax holiday.