Although it can be somewhat frustrating to receive your regular paycheck and notice how much of your gross pay has been consumed by taxes, it may provide some consolation to know that these dollars are being used to fund valuable social programs such as Medicare, Social Security and others. Understanding and identifying the specific percentage of your income that is used for taxes can help you make smart budgeting decisions over both the short and long term.
In every paycheck, 1.45 percent is deducted and routed toward Medicare programs. When it comes to federal taxes, the amount being taken from each paycheck will depend not only on the amount of income being earned by the employee but also the specific withholdings they have requested on their employer W-4.
Social Security and Medicare Tax 2019
Following adjustments to the federal tax code made in recent years, individuals can expect 6.2 percent of their pay up to a maximum income level of $132,900 to be directed toward Social Security, and 1.45 percent of their paycheck income to be routed to Medicare. Federal tax deductions from paychecks will depend not only on the amount of income being earned but also the specific withholdings an individual has claimed on their W-4.
W-4s and Federal Tax Withholdings
The Internal Revenue Service W-4 Form allows individuals to claim specific withholdings that help reduce the amount of tax that is withdrawn from each of their regular paychecks. The IRS uses a specific table to calculate how much money will be returned to the taxpayer on their paycheck for each allowance claimed. These figures are derived from the annual value of each withholding. For example, an individual claiming one withholding allowance on their W-4 will gain access to $4,200 annually in taxable income that would have otherwise been deducted on their regular paycheck.
Keeping that in mind, it is possible to divide this sum by 52 – or the number of weeks in a year – in order to see that a $4,200 annual allowance breaks down into a weekly rate of approximately $80.80. With that it mind, individuals can divide 80.80 by their weekly paycheck amount in order to determine the decimal formatted percentage value of their paycheck that is designated for an allowance.
Social Security Withholdings
As mentioned previously, exactly 6.2 percent of an employee's paycheck is deducted and routed toward the Social Security program. This is a non-negotiable deduction and cannot be avoided through the use of a W-4.
That being said, Social Security deductions are limited to an annual income value of $132,900. For example, if an individual earns $3 million annually, they will only be forced to pay 6.2 percent of $132,900 as part of their Social Security contributions. The remainder of their income is entirely exempt.
Evaluating Medicare Withholdings and the Deduction Amount of Net Pay
1.45 percent of your paycheck will be deducted and routed toward Medicare. Much like Social Security, this is a non-negotiable element of taxation that cannot be dodged through the use of a W-4. It is also important to note that individuals earning in excess of $200,000 per year will also be required to pay an additional 0.9 percent in Medicare taxes on the sum of their income above this particular threshold.
This additional 0.9 percent must be withheld from the employee's paycheck irrespective of their specific withholdings on their W-4. It is the responsibility of their employer to ensure that this money is fully withheld from their paycheck and paid back to the federal government.
Gaining More Information
The IRS provides an extensive table of withholding rates for various income levels pertaining to both single filers and married couples. Individuals can use this information to accurately predict the percentage of their paycheck that will be routed toward their taxes in the event that they do not claim any withholdings.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.