What percentage does federal take out of your paycheck

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Payroll taxes, including FICA tax or withholding tax, are what your employer deducts from your pay and sends to the IRS, state or other tax authority on your behalf. Here are the key factors, and why your tax withholding is important to monitor.

What is FICA tax?

FICA tax includes a 6.2% Social Security tax and 1.45% Medicare tax on earnings. In 2022, only the first $147,000 of earnings are subject to the Social Security tax. In 2023, it rises to $160,200. A 0.9% Medicare tax may apply to earnings over $200,000 for single filers/$250,000 for joint filers.

What is payroll tax? Are FICA tax and payroll tax the same thing?

FICA is often referred to as payroll tax because typically employers deduct FICA tax from employee paychecks and remit the money to the IRS on behalf of the employee.

FICA stands for Federal Insurance Contributions Act.

2022-2023 FICA tax rates and limits

What is withholding tax? How does a withholding tax work?

A withholding tax is an income tax that a payer (typically an employer) remits on a payee's behalf (typically an employee). The payer deducts, or withholds, the tax from the payee's income.

Here's a breakdown of the taxes that might come out of your paycheck.

• Social Security tax: 6.2%. Frequently labeled as OASDI (it stands for old-age, survivors and disability insurance), this tax typically is withheld on the first $147,000 in 2022. Paying this tax is how you earn credits for Social Security benefits later.

• Medicare tax: 1.45%. Sometimes referred to as the “hospital insurance tax,” this pays for health insurance for people who are 65 or older, younger people with disabilities and people with certain conditions. Employers typically have to withhold an extra 0.9% on money you earn over $200,000.

• Federal income tax. This is income tax your employer withholds from your pay and sends to the IRS on your behalf. The amount largely depends on what you put on your W-4.

• State tax: This is state income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live and other factors, such as your W-4 (and some states don’t have an income tax).

• Local income or wage tax: Your city or county may also have an income tax. This money might go toward such expenses as the bus system or emergency services.

How FICA tax or withholding tax are calculated

The amount of tax your employer withholds from your check largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things to know:

• Form W-4 asks about your marital status, dependents and other factors to help you calculate how much to withhold. The less you withhold, the less tax comes out of your paycheck.

• What you put on your W-4 then gets funneled through something called withholding tables, which your employer's payroll department uses to calculate exactly how much federal and state income tax to withhold.

Other payroll tax items you may hear about

• FUTA tax: This stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay it.

• SUTA tax: The same general idea as FUTA, but the money funds a state program. Employers pay the tax.

• Self-employment tax: If you work for yourself, you may also have to pay self-employment taxes, which are essentially the full load of Social Security and Medicare taxes. That’s because the IRS imposes a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. Typically, employees and their employers split that bill, which is why employees have 6.2% and 1.45%, respectively, held from their paychecks. Self-employed people, however, pay the whole thing. Because you may not be receiving a traditional paycheck, you may need to file estimated quarterly taxes in lieu of withholdings.

Why do I have to pay FICA tax?

Employers have to withhold taxes from employee paychecks because taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible.

Some people are “exempt workers,” which means they elect not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come out of their checks, though.

Typically, you become exempt from withholding only if two things are true:

• You got a refund of all your federal income tax withheld last year because you had no tax liability.

• You expect the same thing to happen this year.

Is it better to withhold taxes?

Remember, one of the big reasons you file a tax return is to calculate the income tax on all of your taxable income for the year and see how much of that tax you’ve already paid via withholding tax. If it turns out you’ve overpaid, you’ll probably get a tax refund. If it turns out you’ve underpaid, you’ll have a tax bill to pay.

If you ended up with a huge tax bill this year and don’t want another, you can use Form W-4 to increase your tax withholding. That’ll help you owe less (or nothing) next year.

If you got a huge tax refund, consider using Form W-4 to reduce your tax withholding. You’re giving the government a free loan and — even worse — you might be needlessly living on less of your paycheck all year. It may feel great to get a tax refund from the IRS, but think of how life might’ve been last year if you’d had that extra money when you needed it for groceries, overdue bills, getting the car fixed, paying off a credit card or investing.

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