You will decide on an hourly rate or an annual compensation when you start a new job or obtain a raise. But it’s not as easy as multiplying your hourly rate by the amount of hours you’ll work each week or dividing your annual salary by 52 to figure out your weekly take-home pay. This is due to the fact that your employer deducts taxes from each paycheck, which reduces your take-home pay. Calculating your take-home pay might be challenging due to the different taxes deducted and the various rates. Here’s where our salary estimator comes in.
The most significant tax withheld from your paycheck is income tax, which is the largest tax to be paid. Your income taxes are gradually collected by the federal government over the year by deducting them from each of your paychecks. This money must be withheld by your employer in accordance with the details you include on your Form W-4. Every time you start a new employment, you must complete and return this form to your employer. You may also need to re-submit it after a significant life change, such as getting married.
Your company is required to adjust your paychecks to reflect any changes you make. Federal income taxes are typically deducted from the paychecks of most employees of U.S. companies, however some individuals are exempt. If you satisfy both of the following requirements:
- You had no tax liability in the prior tax year, therefore all federal income tax withheld from your paycheck was refunded to you.
- You anticipate having no federal income tax owed this year, thus all federal income tax withheld will be reimbursed. You can note on your W-4 Form that you believe you are eligible for this exemption.
Federal Top Income Tax Rate
Employees who have tax withholdings must choose between receiving larger paychecks and a lower tax burden. It’s significant to note that, unlike to previous W-4 iterations, the current one does not permit allowance claims. It also eliminates the possibility of claiming personal or dependent exemptions. Instead, filers must input yearly dollar numbers for items including total taxable wages, nonwage income, itemized deductions, and other deductions. The updated version now has a five-step process for entering personal information, claiming dependents, and adding extra sources of income.
Changing your withholdings is one approach to control your tax bill. The drawback of getting the most out of each paycheck is that if, come April, you haven’t had enough withheld to cover your tax liability for the year, you can have a larger tax burden. That would imply that you would owe money on your taxes rather than receiving a refund.
You can err on the side of caution and change your withholding if the thought of receiving a sizable one-time tax bill from the IRS makes you nervous. While you may receive smaller paychecks overall, you have a higher chance of receiving a tax refund and a lower chance of owing money in taxes when you file your taxes.
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Of course, if you choose to withhold more money from each paycheck and receive a larger refund, you’re in essence lending the government the additional funds. If you choose to have less deductions made from your paychecks, you may invest the additional cash or put it in a high-interest savings account to make money with it over the course of the year. Additionally, you might utilize that extra cash to pay off additional loans or other obligations.
When you fill out your W-4, there are worksheets that will guide you through withholdings based on your marital status, how many kids you have, how many jobs you hold, your filing status, whether someone else claims you as a dependent, whether you intend to itemize your tax deductions, and whether you intend to claim any tax credits. By requesting a specific dollar amount of additional withholding from each paycheck on your W-4, you can also fine-tune your tax withholding.
You can better grasp how taxes relate to your overall financial objectives by consulting a financial counselor.
You can interview your advisor matches for free to choose which one is best for you using SmartAsset’s free tool, which matches you with up to three local financial advisors. Get going right away if you’re prepared to look for a financial advisor who can assist you in reaching your objectives.
How Your Paycheck Works: FICA Withholding
The second significant federal withholding from your paycheck, aside from income taxes, is for FICA taxes. The Federal Insurance Contributions Act is referred to as FICA. Your contribution to the Social Security and Medicare programs, which you’ll have access to as a senior, comes from your FICA taxes. It’s how you contribute to the system.
Each party contributes equally to FICA: the employee and the employer. Social Security taxes are deducted from 6.2% of each of your paychecks, and your employer also contributes 6.2%. Only income up to the Social Security tax ceiling, which for 2022 is $147,000 ($160,200 for 2023), is subject to the 6.2% tax rate. Therefore, Social Security taxes are not deducted from any income you make above that ceiling. However, Medicare taxes will still be deducted from it.
Medicare taxes do not have an income cap. Medicare taxes are deducted from each of your paychecks at a rate of 1.45%, and your employer also contributes 1.45%. You will be responsible for paying an additional 0.9% in Medicare taxes if your income exceeds a specified threshold. Here is a breakdown of these sums for the 2022 and 2023 tax years.
- $200,000 for single filers, heads of household and qualifying widow(er)s with dependent children
- $250,000 for married taxpayers filing jointly
- $125,000 for married taxpayers filing separately
2022 – 2023 Income Tax Brackets
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
|$0 – $10,275||10%|
|$10,276 – $41,775||12%|
|$41,776 – $89,075||22%|
|$89,076 – $170,050||24%|
|$170,051 – $215,950||32%|
|$215,951 – $539,900||35%|
The self-employment tax, which is equivalent to both the employee and employer shares of FICA taxes (15.3% in total), must be paid if you work for yourself. Fortunately, you can deduct the half of the FICA payments that your employer would ordinarily pay when you submit your taxes. Because of this, your FICA taxes for Social Security and Medicare are still only 6.2% and 1.45%, respectively.
How Your Paycheck Works: Deductions
There is no way to avoid paying federal income tax and FICA tax withholding unless your income is extremely low. They do not, however, represent the only considerations that go into determining your income. Deductions are another thing to think about.
For instance, if you contribute anything to your employer-sponsored health insurance, that sum is taken out of your wages. You may see the amount withheld from each paycheck when you sign up for your employer’s health plan. Your paychecks will also be withheld if you want to make contributions to a Health Savings Account (HSA) or Flexible Spending Account (FSA) to aid with medical expenses.
Any pre-tax retirement contributions you make are additionally taken out of your wages. Before taxes are deducted from your paycheck, you make these contributions. Pre-tax contributions for retirement funds like a 401(k) or 403(b) are the most popular (b). Therefore, if you decide to contribute 10% of your income to your employer’s 401(k), 10% of your salary will be deducted from each check you get. Your paychecks will shrink if you increase your contributions. Pre-tax contributions, however, will also lower the portion of your earnings that is liable to income tax. Additionally, the money grows tax-free, meaning that you only pay income tax when you withdraw it—hopefully after it has significantly increased.
Some withholdings are made post-tax from your paycheck. Roth 401(k) contributions are among them. Your paychecks are used to fund these accounts after income tax has been deducted. The money in a Roth IRA or Roth 401(k) grows tax-free, and you don’t pay income taxes when you withdraw it, so using one of these accounts is a better option than one that accepts pre-tax funds (since you already paid taxes on the money when it went in). This type of account could end up saving you money on taxes in the long run if you are just starting out in your profession or anticipate your income to increase.
How Your Paycheck Works: Pay Frequency
Some people receive paychecks every month (12 per year), while others are paid twice a month (24 paychecks per year) on predetermined days, while yet others receive biweekly payments (26 paychecks per year). Your paychecks’ size will depend on how frequently you receive them. Assuming the same wage, the smaller each paycheck gets as you receive more each year.
How Your Paycheck Works: Local Factors
Your take-home pay will be impacted by income taxes if you reside in a state or municipality that levies them. Your company will deduct money from each of your paychecks to pay for state and local taxes, just like they do for your federal income taxes.