If you receive a paycheck from an employer, it’s important that you review it on a regular basis, especially if you do direct deposit. You want to make sure you’re getting paid the correct amount and not paying more than necessary in taxes. The deductions you see on your paystub explain the difference between your gross pay and net pay, so it’s important to know what they all mean. We’re breaking it all down for you below.
The amount you pay in taxes depends on a few factors, including where you live, the number of dependents you have, and where you are paid.
Federal Income Tax
This is the amount of money withheld by the federal government. Employers report your salary or hourly wages and the number of dependents from your W-4 form to the federal government and the IRS works out an estimate of what you should pay for the year. The amount is then spread across your paychecks and deducted from each paycheck. To avoid paying too much or too little, be sure to report any changes (like having a child) to your HR department as soon as possible so they can adjust your number of dependents.
State & Local Tax
State and local tax rates vary. If your state charges income tax, it is calculated in the same way as your federal tax rate. There are nine states that do not collect income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
If your city collects a tax, you’ll see this labeled as “local” or with the name of your locality on your paycheck. This amount will only change if the amount you earn changes.
Federal Insurance Contributions Act (FICA) taxes support Social Security and Medicare. Everyone contributes 6.2% of their gross income to social security and the employer contributes another 6.2%. Those who are self-employed are responsible for both portions.
- For Medicare, every worker contributes 1.45% of their gross income, with employers paying an additional 1.45%. If you are self-employed, you’re responsible for both portions here as well.
Other common deductions
Outside of these standard tax deductions, there are others that might appear on your paystub.
If you are getting insurance (medical, dental, life or disability) through your employer, your contributions will appear on your paystub. Often these are pre-tax deductions, which means you’re paying for insurance before you are taxed and will not owe taxes on that amount.
If you contribute to a retirement plan, you’ll see that on your paystub as well. This includes traditional IRAs, Roth IRAs, SEP IRAs, and 401(k)s.
Flexible spending accounts (FSA) or health savings accounts (HSA)
If you are enrolled in a FSA or HSA program, your contributions will be listed on your paycheck. These programs allow those with health insurance to set aside money for medical expenses to be used tax-free.
If you see any other deductions listed on your paystub, check with your human resources department for more information.