What you actually pay depends on your income and filing status

Payroll tax is not one number — it is a combination of three separate taxes that come out of your paycheck, and the amount you pay depends on how much you earn and what you claim on your W-4 form. The three taxes are Social Security (6.2%), Medicare (1.45%), and federal income tax (which varies). Your employer pays an equal amount of Social Security and Medicare on your behalf, but you do not see that money. What you see is only your half.

The federal income tax portion is the one that changes most. It is based on your W-4 answers — specifically, how many dependents you claim and whether you have a second job or a spouse who works. If you claim zero dependents, more money comes out. If you claim the actual number of dependents you have, less comes out. The Social Security and Medicare portions are fixed percentages that do not change based on your answers.

Your state may also withhold state income tax, and some cities withhold local tax. Those rates vary by location and are separate from the federal amounts.

Key Takeaways

  • Social Security withholding is 6.2% of your gross pay, and Medicare withholding is 1.45%, for a combined 7.65% that is the same for all workers.
  • Federal income tax withholding varies based on your W-4 form — specifically your filing status, number of dependents, and whether you have multiple jobs or a working spouse.
  • Your employer pays an equal amount of Social Security and Medicare tax, but that money does not appear on your paycheck.
  • State and local income taxes, if your location has them, are withheld separately and are in addition to federal payroll tax.
  • You can adjust your withholding by submitting a new W-4 to your employer, and the change takes effect on your next paycheck.

Social Security and Medicare are fixed percentages

These two taxes are straightforward because the rate never changes. Social Security takes 6.2% of your gross pay (the amount before any deductions), up to a wage cap that changes each year. In 2024, the cap is $168,600 — meaning once you earn that much in a year, no more Social Security tax comes out of your remaining paychecks for that year. Medicare takes 1.45% of your gross pay with no cap, so it continues no matter how much you earn.

Together, Social Security and Medicare make up 7.65% of your paycheck. This percentage is the same whether you earn $30,000 a year or $300,000 a year. The only variable is the Social Security cap, which resets on January 1 each year.

If you are self-employed, you pay both the employee and employer portions (15.3% total), but that is a different calculation handled on Schedule SE of your tax return.

Federal income tax withholding is based on your W-4

This is the part that varies most from person to person. When you start a job, you fill out a W-4 form and tell your employer how many dependents you claim and whether you have other income sources. Your employer uses that information to calculate how much federal income tax to withhold from each paycheck. The IRS provides a withholding calculator on its website (irs.gov) that can help you figure out what to claim.

If you claim more dependents than you actually have, less tax comes out of your paycheck — but you will owe money when you file your return. If you claim fewer dependents, more tax comes out — and you will get a refund. There is no "correct" answer; it depends on whether you want more money in each paycheck or prefer to get a lump sum back in April.

Common situations that require a W-4 change: you got married, you had a child, your spouse started working, you took a second job, or your income changed significantly. You can submit a new W-4 to your employer at any time, and the new withholding takes effect on your next paycheck.

State and local income tax is separate

Forty-one states have an income tax, and some cities do as well. These are withheld separately from federal tax and go to your state or city government, not the IRS. The rates vary widely — some states withhold 3%, others withhold 8% or more. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) have no state income tax at all.

You typically fill out a state W-4 form when you start a job, similar to the federal form. Some states use the same form as the federal W-4; others have their own. If you move to a different state during the year, you may need to submit a new state W-4 to adjust your withholding.

Local taxes are less common but do exist in some cities and counties. Philadelphia, for example, has a local income tax of 3.8712%. If your city has one, your employer will withhold it automatically if you live or work there.

How to read your pay stub

Your pay stub shows exactly what was withheld. Look for these line items: Gross Pay (your total earnings before deductions), Federal Income Tax Withholding, Social Security, Medicare, and any state or local tax. The Social Security and Medicare amounts should always be the same percentage of your gross pay. The federal income tax amount will vary based on your W-4.

If the federal withholding seems too high or too low, use the IRS withholding calculator to check your W-4. You can also look at your year-to-date totals on your pay stub — if you are halfway through the year and have already paid more in federal tax than you expect to owe, you may want to adjust your W-4 to reduce withholding for the rest of the year.

Keep your pay stubs throughout the year. They are proof of income and withholding, and you will need them if you ever dispute a tax issue or explore for a loan.

What happens if too much or too little is withheld

If too much is withheld, you will get a refund when you file your tax return. If too little is withheld, you will owe money. Neither is a penalty — it is straightforward a correction. However, if you owe a large amount and did not pay enough throughout the year, you may owe a small penalty for underpayment, though this is rare for typical W-2 employees.

The goal is to withhold roughly the right amount so that when you file your return, you owe very little or get a small refund. If you consistently get large refunds, you are letting the government hold your money interest-free for a year. If you consistently owe, you are giving the government an interest-free loan and then paying it back in April.

To adjust, fill out a new W-4 and give it to your payroll department. The change takes effect on your next paycheck. You can adjust as many times as you need during the year.

Self-employment tax is different

If you are self-employed or have 1099 income, you do not have an employer to withhold taxes for you. Instead, you pay estimated tax four times a year (quarterly) directly to the IRS. Self-employment tax includes both the employee and employer portions of Social Security and Medicare, which totals 15.3% of your net self-employment income (after business expenses).

You also owe federal income tax on your self-employment income, calculated the same way as for W-2 employees. Many self-employed people set aside 25% to 30% of their income to cover both self-employment tax and income tax, then settle the exact amount when they file their return.

If you have both W-2 income and self-employment income, the Social Security tax on your W-2 income counts toward the annual cap. This means you might pay less self-employment tax on your 1099 income if your W-2 income already hit the cap.

Frequently Asked Questions

Why do I pay Social Security and Medicare tax if I might not collect it?

Social Security and Medicare are mandatory programs funded by current workers' taxes. You pay into them throughout your working life, and the money goes to current retirees and disabled workers. When you retire or become disabled, your benefits come from the taxes paid by workers at that time. It is a pay-as-you-go system, not a savings account.

Can I avoid federal income tax withholding?

You can claim exempt on your W-4 only if you had no tax liability last year and expect to have none this year. Most workers cannot claim exempt. If you claim exempt and you actually owe tax, you will owe it all in April with no withholding to offset it. The IRS can also penalize you for claiming exempt incorrectly.

What if my withholding is wrong and I do not notice until tax time?

You will either owe money or get a refund when you file your return. If you owe a small amount, you can pay it with your return. If you owe a large amount, you can set up a payment plan with the IRS. If you get a refund, the IRS will send it to you, usually within 21 days of processing your return.

Do I have to fill out a W-4 every year?

No. Your W-4 stays in effect until you change it. However, the IRS recommends reviewing your W-4 each year, especially if your life circumstances changed — marriage, divorce, a new child, a second job, or a significant income change.

What if I have two jobs — do I pay payroll tax on both?

Yes. Each employer withholds Social Security and Medicare on your wages from that job. However, Social Security has an annual cap, so once your combined income from all jobs hits the cap, no more Social Security tax comes out. Medicare has no cap and continues on all income. You can adjust your W-4 at one or both jobs to account for the second income.