What’s the difference between how taxes work for employees and independent contractors?

Employees have federal, state, and FICA (Social Security and Medicare) taxes withheld from each paycheck by their employer. Independent contractors, on the other hand, are paid in full and must handle their own taxes — including estimated quarterly payments for both income and self-employment taxes. Employers issue: W-2 forms for employees (showing wages and tax withholdings) 1099-NEC forms for contractors (showing total payments made) Understanding this distinction is crucial since misclassifying workers can lead to IRS penalties and back taxes.

How does Form W-4 affect how much tax is withheld from my paycheck?

Form W-4 determines how much federal income tax your employer withholds. It takes into account your filing status, number of dependents, and any additional withholdings you request. If your personal situation changes — for example, marriage, having a child, or taking a second job — you should update your W-4 immediately to avoid owing money or overpaying at tax time. Employers are required to keep your most recent W-4 on file.

What happens if I’m classified incorrectly as an independent contractor instead of an employee?

If you’re wrongly treated as an independent contractor, you may end up overpaying self-employment taxes and missing out on benefits like unemployment insurance or employer-paid FICA contributions. The IRS uses three tests — behavioral control, financial control, and contractual relationship — to determine worker status. If you believe you’ve been misclassified, you can file Form SS-8 with the IRS to request an official determination.

What information does an employer need to process payroll correctly?

To process payroll accurately, employers must gather for each worker: Personal and Tax Details: via W-4 (employee) or contractor information (1099-NEC) Payroll Cycle: weekly, biweekly, or monthly schedule Gross Wages: based on salary or hourly rate Withholdings: including taxes, benefits, or garnishments Net Pay: the final take-home amount after deductions Having accurate, updated information prevents under- or overpayment and ensures compliance with tax laws.

How is net pay calculated from gross pay?

To find your net pay, subtract all deductions (taxes and other withholdings) from your gross pay. For example: If your gross pay is $2,308, and you have the following deductions: Federal tax: $462 State tax: $115 Health insurance: $50 Then your net pay is $1,681 . ($2,308 - $462 - $115 - $50)

What are employers’ responsibilities when issuing tax forms each year?

Employers have several key responsibilities when issuing tax forms each year. They must provide Form W-2 to each employee and Form 1099-NEC to every independent contractor by January 31st. In addition, employers must file copies of these forms with the IRS and, in many cases, with the appropriate state tax agencies. Accurate year-end reporting ensures that both workers and the IRS can properly track taxable income and verify that the correct taxes have been paid. To simplify this often time-consuming process, many small businesses rely on payroll software or online form generators like FormPros, which help ensure accuracy and compliance while saving valuable time.

What non-tax deductions might appear on a paycheck?

Beyond taxes, your paycheck may include deductions such as: Health, dental, or vision insurance premiums Retirement plan contributions (401(k), 403(b)) Flexible Spending or Health Savings Account contributions Union dues or wage garnishments Some of these — like health insurance and retirement contributions — are pre-tax, reducing your taxable income. Others, such as garnishments or union dues, are post-tax. Reviewing your paystub each pay period ensures you understand where your money is going.

What Taxes Get Taken Out of Your Paycheck?

Last updated October 7, 2025

If you’ve ever glanced at your paycheck and wondered why the amount you take home is so much lower than your gross salary, you’re not alone. Between federal and state obligations, and a few other mandatory deductions, your paycheck can shrink quickly — and not all of it is easy to decode.

Knowing exactly which taxes your paycheck withholds is more than just a financial curiosity. It helps you budget smarter, avoid surprises at tax time, and make informed decisions about withholding, benefits, and retirement planning.

In this guide, we’ll break down the specific taxes that routinely come out of employee paychecks in the U.S. — no fluff, no distractions — just a clear look at what’s taxed, how much, and why it matters to your bottom line.

Federal Income Tax

The largest and most consistent tax withheld from your paycheck is the federal income tax. This tax goes to the U.S. Treasury and helps fund everything from infrastructure to national defense. But the amount you pay isn’t one-size-fits-all — it depends on your income, tax filing status, and the details you provide on your Form W-4.

When you start a new job, your employer asks you to fill out Form W-4, which tells them how much federal income tax to withhold from each paycheck. The IRS uses a progressive tax system, which means the more you earn, the higher your tax rate. Your employer uses IRS tax tables and your W-4 to estimate your total annual tax bill, then withholds small portions of it from each paycheck throughout the year.

Key factors that affect how much is withheld:

Filing status (single, married, head of household)
Dependents or child tax credits claimed
Additional withholding you request
Multiple jobs or working spouses (which require extra adjustments)

At tax time, you compare the total amount withheld to what you actually owe. If you overpaid, you’ll get a tax refund. If your employer withheld too little, you’ll owe the IRS money.

*Tip: If your tax situation changes — like getting married or taking on a second job — it’s a good idea to update your Form W-4 to avoid surprises at tax time.*

Another major deduction you’ll see on your paycheck is the Social Security tax, which helps fund retirement and disability benefits for U.S. workers. This tax is part of the FICA (Federal Insurance Contributions Act) payroll tax and applies to most employees.

For employees, the Social Security tax rate is 6.2% of gross wages, and your employer is required to match that amount. That means a total of 12.4% of your income goes into the Social Security system — half from you, half from your employer.

However, this tax only applies up to a certain amount of earnings. In 2025, that wage cap is $168,600. If you earn more than that, the excess is not subject to Social Security tax.

All W-2 employees pay 6.2%, regardless of income tax bracket
Employers contribute an equal 6.2% on your behalf
There is an annual wage limit (adjusted each year by the IRS)
Exemptions are rare and usually limited to certain foreign students or specific visa holders

While it may seem like a large chunk of your paycheck, your contributions help ensure you’ll receive monthly benefits in retirement — or support if you become disabled.

*Tip: You can check your lifetime Social Security contributions and estimated benefits anytime by creating an account at SSA.gov.*

Medicare Tax

In addition to Social Security, your paycheck also includes a Medicare tax, which helps fund health insurance for people aged 65 and older, as well as certain younger individuals with disabilities. Like Social Security, it’s part of the FICA payroll tax, and employees and employers share the cost.

The standard Medicare tax rate is 1.45% of all gross earnings, with no income cap. That means every dollar you earn is subject to this tax — even if your income goes well beyond six figures. Your employer matches this with another 1.45%, bringing the total contribution to 2.9%.

If you’re a high earner, you may also be subject to an additional Medicare tax:

Employers withhold an extra 0.9% on wages over $200,000 for single filers (or $250,000 if married and filing jointly).
Employers do not match this additional tax; only the employee pays it.

Key facts about Medicare tax:

Everyone pays 1.45% — there’s no earnings limit
Employers match your contribution
High-income earners may see an extra 0.9% withheld
Funds go toward Medicare hospital insurance (Part A)

*Tip: If you see “Medicare Additional Tax” on your pay stub, it’s likely because your income exceeded the threshold. You reconcile this amount when you file your federal tax return.*

State Income Tax

Depending on where you live and work, you may also see state income tax withheld from your paycheck. This tax helps fund public services like schools, roads, and law enforcement within your state. Unlike federal taxes, state income tax rules and rates vary widely.

Currently, most U.S. states impose an income tax, but a handful do not. If you’re in a state with income tax, your employer will automatically withhold a portion of your wages and send it to the state’s revenue department. This withholding is based on the information you provide on your state version of the W-4 (which may go by a different name depending on the state).

States generally use one of two systems:

Flat tax rate (e.g., Colorado or Illinois) — everyone pays the same percentage
Progressive tax rate (e.g., California or New York) — higher earners pay a higher percentage

Key points about state income tax:

Not all states collect income tax (e.g., Florida, Texas, and Nevada do not)
Tax rates and brackets differ from state to state
Your work location often determines which state’s tax applies — not necessarily where you live
Some cities and counties also charge local income tax (more on that next)

*Tip: If you move between states or work remotely, double-check your tax withholding to avoid overpaying or underpaying. Some states have reciprocal agreements that dictate how they tax you.*

Local Taxes

In addition to federal and state income taxes, some employees may also see local income taxes deducted from their paychecks. These taxes are imposed by cities, counties, or even school districts, and they help fund services like public transportation, safety, and education at the local level.

Not everyone pays local taxes — they’re only collected in certain areas. For example:

New York City and Philadelphia have local income taxes for residents and workers
In Ohio, many municipalities charge local taxes, which are often withheld by employers
Some school districts in Pennsylvania and Indiana also levy taxes on wages

Local tax rates are generally low, ranging from about 0.5% to 3%, but they can still make a noticeable dent in your paycheck. Like state taxes, your employer is responsible for calculating and withholding the appropriate amount based on where you live and/or work.

Key points about local taxes:

Only apply in certain jurisdictions — not nationwide
Often based on your residence, work location, or both
Rates and rules vary by city, county, or district
Withheld automatically by your employer if applicable

*Tip: If you’re unsure whether local taxes apply to you, check your paystub or ask your HR department. And if you move, update your address to avoid incorrect withholdings.*

Understanding FICA, FUTA, and SUTA Taxes

Beyond federal and state income taxes, every paycheck also reflects other key payroll taxes that fund critical programs. Employers must withhold these correctly and report them clearly on employee paystubs.

Tax	Who Pays	Rate	Wage Base	Notes
FICA – Social Security	Employee & Employer	6.2% each (12.4% total)	Up to $176,100	Max contribution per side: $10,918.20
FICA – Medicare	Employee & Employer	1.45% each (2.9% total)	No cap	Additional 0.9% applies to employee wages greater than $200,000
FICA – Total Standard Rate	Employee & Employer	7.65% each (15.3% total)	Varies	Covers retirement, disability, and Medicare programs
FUTA	Employer only	6.0%	First $7,000 of wages	Effective rate often 0.6% with state tax credit
SUTA	Employer only (in most states)	Varies by state (0.0%–8.9% in NY)	State-specific ($12,800 in NY)	Funds state unemployment programs

Common Payroll Deduction Codes

Paystubs often use standardized codes to represent specific deductions. Understanding these abbreviations helps employees verify accuracy:

AMT – Additional Medicare Tax (0.9% on wages over $200,000)
NYC / YON – Local income taxes (e.g., New York City, Yonkers)
TRN – Transit or parking benefit deductions
UNION – Labor union dues
CFC – Charitable contributions through employer programs
Cafeteria Plan – Pre-tax benefits under Section 125 plans
GARN – Court-ordered garnishments (child support, debts)
529 – College savings plan contributions
MTX – Miscellaneous taxable items (e.g., moving expense reimbursements)

Employers must use the correct codes and clearly label each deduction to avoid confusion and ensure legal compliance.

Other Potential Payroll Deductions (Not Taxes)

Not everything taken out of your paycheck goes to the IRS or your state government. In fact, a large portion of your deductions may be related to benefits you’ve opted into or other financial obligations. These aren’t taxes — but they still shrink your take-home pay. Let’s break them down:

💊 Health Insurance Premiums:

— If you signed up for medical, dental, or vision coverage through your employer, your share of the monthly premium is deducted from your paycheck — often on a pre-tax basis, which lowers your taxable income.

💼 Retirement Plan Contributions:

— Many employers offer retirement savings plans like a 401(k) or 403(b). Contributions are typically deducted before taxes (unless you’re using a Roth option). These deductions reduce your taxable income now, and grow your nest egg for later.

💳 FSAs and HSAs:

— Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) let you set aside money for healthcare or dependent care costs. These are also pre-tax deductions, and they can be a great way to save on expected medical expenses.

🛠️ Union Dues:

— If you belong to a union, dues may be withheld directly from your pay. These are usually post-tax deductions, meaning they don’t reduce your taxable income.

⚖️ Wage Garnishments:

— In some cases, a court may require your employer to deduct money from your paycheck to pay for things like child support, tax debt, or defaulted student loans. These garnishments are legally mandated and typically deducted after taxes.

*Heads-up: Not all employers break down these deductions clearly. It’s a smart habit to review your paystubs regularly and confirm that your withholdings match what you’ve signed up for — especially after benefits enrollment or life changes.*

Take Control of What Comes Out of Your Paycheck

Understanding the taxes and deductions on your paycheck isn’t just for accountants — it’s a smart move for anyone who wants to manage their money more confidently. From federal income tax to Medicare and state withholdings, knowing where your earnings go can help you plan better, spot errors early, and avoid surprises at tax time.

If you’re ever in need of a clear, professional pay stub for a loan, rental application, or personal records, FormPros makes it easy to generate pay stubs online in minutes. It’s fast, secure, and tailored to your needs.

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