Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • January 12, 2024 2:03 PM
OVERVIEW
You may wonder why so much money comes out of your pay, where it goes, and what can be done to change the deducted amount. The good news is that you usually have some control over your deductions.
Key Takeaways
• The largest amount withheld from your wages is usually for federal income taxes. The amount withheld is based on your gross income, your W-4 Form, and a variety of other factors.
• Your employer also withholds 6.2% of your wages to pay your portion of the Social Security tax to help fund Social Security and Medicare. Your employer pays the same amount.
• If you work in any of the 41 states that have income taxes, your employer may withhold state income taxes. Additionally, localities within 17 states levy taxes that are automatically withheld from wages.
• Six states require employees to pay disability taxes. Three states have unemployment insurance taxes. One state has a workers’ compensation tax.
Why are my taxes so high on my paycheck?
The significant amount of taxes taken from your paycheck may come as a surprise. There are several reasons why your paycheck may be smaller than expected, including:
- Federal, state, and local income taxes (if applicable)
- Social Security and Medicare taxes (also known as FICA taxes)
- State disability taxes (if applicable)
In addition to taxes, you may also have deductions taken out of your paycheck, such as:
- Retirement contributions
- Insurance premiums
- Union dues
- Charitable contributions
- 401k loan payments
How much is taken from your paycheck may depend on factors like:
- Your income
- Where you live
- Withholdings selected on your W-4 form
If you want to reduce taxes withheld from your paycheck and increase your take-home pay, you may need to make some adjustments to your W-4. The TurboTax W-4 calculator can help dial in your withholdings.
How much of your paycheck goes to taxes?
Payroll deductions perform a valuable service. Without them, taxpayers would be responsible for figuring out how much of their paycheck to withhold for federal taxes and then sending the correct amount to various agencies as they earn their income throughout the year. This isn’t considered ideal for the government or taxpayers.
- Those who have no money deducted from their income for taxes — such as the self-employed — can encounter problems when it's time to file their income tax returns.
- One common problem when you’re filing taxes as self-employed is a surprising and substantial tax bill at tax time, especially if you’re unprepared and unable to pay the amount in full.
The government established the system of payroll withholding to help prevent these kinds of surprises, lower the likelihood of unpaid tax liabilities, and to ensure a steady flow of money to the U.S. Treasury
Here’s an overview of the percentage of your paycheck withheld for federal taxes, why so much comes out of your pay, where that money goes, and what can be done to change the deducted amount.
What portion of my paycheck is withheld for federal deductions?
The largest withholding is usually for federal income tax. The amount taken out is based on your gross income, your W-4 Formthat describes your tax situation for your employer, and a variety of other factors. Other federal deductions pay for Social Security and Medicare, which are part of the federal benefit and health care systems for the aged and other groups.
- The Social Security tax is 6.2% of wages for the employee and the same for the employer.
- Social Security tax is not collected on income in excess of a certain level, which was most recently set to $160,200 in 2023.
- The Medicare tax rate is set to 1.45% on all wages.
- The additional Medicare tax of 0.9% is withheld on annual wages in excess of $200,000.
What portion of my paycheck is withheld for state and local payroll deductions?
Forty-one states have income taxes and while some have flat-rate deductions, others base certain taxes according to a table.
- Localities within 17 states levy taxes that are automatically withheld from wages.
- Some such local taxes are in flat dollar amounts, some are calculated as a percentage of income to withhold, and others use IRS-like tables.
- In six states and U.S. territories, employees pay disability taxes.
- Three states have unemployment insurance taxes.
- One state has a workers' compensation tax.
What percent of your paycheck goes to taxes?
The total percent that comes out of your paycheck will be determined by the follow:
- For federal deductions, about 8.55% of your paycheck will go to taxes, but you’ll need to account for state deductions on top of that.
- The percentage of your paycheck that goes to state taxes will vary based on how taxes are levied.
- Different income tax brackets apply depending on how much money you make. Generally speaking, a higher percentage is typically taken out of your paycheck if you earn a higher level of income.
TurboTax Tip: You can adjust your withholding using Form W-4. To calculate how much you should take out of each paycheck, you can use a W-4 Withholding Calculator and try a few different tax scenarios to find what works best for you.
How to change your take-home pay?
If you're trying to determine how much of your paycheck is withheld for federal income tax and how you can adjust it — it all comes down to Form W-4. To calculate how much you should take out of each paycheck, use a W-4 Withholding Calculator and try a few different tax scenarios to find what works best for you.
The new format for the W-4 form introduced in 2020 allows you to indicate how much money you earn from additional jobs or how much your spouse makes to set accurate withholding levels.
- Additionally, you can adjust for child tax credits, credits for other dependents, and any other relevant tax deductions you plan to take in excess of the standard deduction.
- By claiming more deductions or tax credits for children and other dependents, you will lower the amount withheld from your check for federal income tax.
You may be able to simply ask for an additional specific dollar amount to be withheld. The W-4 comes with a worksheet to help you calculate the amount you want to have taken out.
- If you enjoy the thrill of a large refund, don't claim any extra deductions or make adjustments for other credits.
- Conversely, the more credits and deductions that you specify, the larger your regular paycheck will be — and the lower your refund will be.
Most tax experts advise you not to go for a large refund because that, in effect, means you're giving the government an interest-free loan. Financial advisors typically recommend that you should maximize your paychecks and invest the extra money throughout the year.
How do non-governmental paycheck deductions affect your paycheck?
Non-governmental deductions from your paycheck might reduce your take-home pay, but they can improve your overall tax situation. If you’re an employee and you participate in qualified employer-sponsored retirement programs, for example, the amount of your contributions can usually reduce your taxable wages.
- Participation in medical, dental, and dependent care plans may also reduce your tax burden.
- In some cases, depending on how the company structures its benefits, even certain expenses may be deducted from your pay and reduce your taxable income.
Why did less tax come out of your paycheck?
If you find that your paycheck is larger than usual, there might have been an error. In some cases, your employer may have mistakenly:
- Withheld less than you've indicated on your W-4 form.
- Marked you as exempt for federal, state, or local taxes.
- Changed your 401(k) contribution amount.
- Withheld the wrong amount for benefits like health insurance.
Other reasons that your paycheck might get bigger is if you:
- Maxed out your 401k contributions for the year
- Have earnings over the Social Security maximum taxable earnings for the year ($160,200 for 2023)
- Contributed the maximum amount to your health savings account (HSA)
If you believe that less tax was withheld than there should have been, you should review your paycheck and bring any issues to your employer’s attention as soon as possible so it doesn’t happen again on the next paycheck.
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