Introduction

You know that the amount you earn for a job differs from your take-home pay. Usually, an employer will take out payroll taxes and other deductions before you receive your salary. Understanding what these deductions mean, how they’re calculated, and how they affect your paycheck can help you stay on top of how much money is left over after taxes are taken out every time you get paid.

Gross pay and deductions

Gross pay is the amount you earn before taxes, insurance, and other deductions. When you get your paycheck stub at the end of each month, it will say: gross pay.

Gross pay is not the same as net income or take-home pay; instead, it refers to what you are paid for your services.

Pretax deductions

Deductions are amounts that are taken out of your paycheck before taxes. They can be taken out before or after taxes, depending on what type of deduction it is. Deductions can also be taken from gross pay or net pay (after taxes).

Deductions are not the same as credits, which are subtracted from your tax bill after you calculate it based on your income and other information provided by the government (such as dependents).

Taxable income calculation

Calculate your taxable income by subtracting all of the tax deductions and credits from your gross pay. Taxable income is what’s left over after federal, state, and local taxes are taken out of your paycheck.

Paycheck example: You earn $3,000 monthly in gross pay and have $200 deducted for health insurance premiums (a pretax deduction). Your total taxable income would be $2,800 ($3K – $200).

Marginal tax rates vs. average tax rates

• You may be familiar with average tax rates but less with marginal ones.
• Average tax rates are the total amount you pay in taxes divided by your total income. In other words, it’s how much you spend on average per dollar earned (not including payroll taxes). For example, if you make $50k per year and your average federal income tax rate is 20%, then each dollar earned costs 20 cents in taxes beforehand–that is, before taking into account any deductions or credits that might lower it further still (more on those later).
• Marginal tax rates differ from this because they apply only to additional dollars earned beyond a certain point–the last one! If a person earns $50k one year but only makes $49k another year due to bonuses or raises during those years’ respective tax seasons, then their marginal rates will vary accordingly: if he made more money overall during Year One than Year Two (thus increasing his total taxable income), then even though both years had exactly equal averages ($25k), he’d likely owe more money overall due *only* because

Federal income tax brackets

Federal income tax brackets are the ranges of income in which you pay a certain percentage of your gross earnings to the federal government. The number and range of these brackets vary depending on your filing status, age, and whether or not you’re claiming dependents.

In 2019 there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates apply only to income above $19,050 for single filers and $39,000 for married joint filers; there’s no tax due on that first chunk. Taxpayers can use this table to determine the bracket(s) they fall into:

• If your taxable income is less than $19,050 as an unmarried individual or $39,000 if married filing jointly, use column 1 in Table 2 above (10%).
• If your taxable income falls between $19,051-$38k, use column 2 from Table 2 above (12%).
• If your taxable income falls between $38k-$70k, use column 3 from Table 2 above (22%).

Social Security and Medicare taxes

The U.S. government collects Social Security and Medicare taxes from all employees, whether they are paid as an hourly wage or salary. These taxes are typically withheld from your paycheck by your employer, though you may have to pay them yourself if you’re self-employed and cannot claim the standard deduction on your tax return (more on this later).

The Social Security tax rate is 6.2% of gross wages; however, there’s a cap on how much income can be taxed at this rate–$128k in 2019 and $132k in 2020 (for more info on what counts toward this cap, see our article here). In addition to paying into Social Security through payroll deductions every payday throughout the year, most workers contribute 1.45% of their income towards Medicare via withholding from each paycheck. Unlike Social Security contributions which are capped at a particular amount depending on your income level over those years mentioned above (and thus won’t increase unless Congress raises them), there’s no limit imposed upon how much additional money may be deducted each month for Medicare purposes; therefore if you earn enough money during that same time frame then expect more taken out automatically without any prior warning given beforehand either!

Payroll deductions

Payroll deductions are the amount of money deducted from your paycheck. These include things like taxes, insurance, and retirement plans. Payroll deductions are different from pretax deductions, which are the amount of money you have already paid using pre-tax dollars.

Payroll deductions vary depending on your employer and how much they choose to take out of each paycheck for certain expenses or benefits. Some employers offer more generous benefits than others; however, there are some standard amounts that most companies will deduct from each employee’s paychecks:

State income taxes

State income taxes are calculated by the state where you live. Most states have a flat tax rate, but some have progressive tax rates. Your state taxes will depend on your total income and the number of exemptions (if any).

Some states also have special tax breaks for certain types of income or deductions, such as child support payments or health care costs not covered by insurance.

Local taxes

Your local taxes will be different in every state. In some states, you pay a flat tax rate on your income, and then the state takes a percentage of your federal taxes. Other states have different rates depending on your income (for example, if you’re self-employed).

Once again, this information is available online for free at [insert website]. You can also find it by looking up “state and local tax rates” on Google or Bing search engines.

Tax credits and deductions

You can use tax credits to lower your taxes and deductions to lower your taxable income. These two strategies often need clarification, but they’re very different things.

Deductions reduce the amount of income subject to tax by lowering the amount you calculate your federal income tax liability. For example, if you make $50,000 annually and have $5,000 in qualified charitable contributions (deductible), only $45,000 will be taxed instead of $50K.

Tax credits can only reduce your actual tax bill dollar-for-dollar–they don’t change how much is being taxed or which bracket applies to any given chunk of money; rather than reducing taxable income like a deduction would do, they directly reduce whatever amount would’ve been owed after all other beliefs were taken into account (and thus allow for more favorable rates). In other words: If someone owes $10K in taxes but qualifies for an Earned Income Tax Credit worth $2K ($12K total), then instead of owing nothing at all like they might have without those benefits since there wasn’t anything left over after applying all standard deductions such as state/local taxes paid during the calendar year 2018 along with charitable donations made within the same period(s) above mentioned., now there’s still some cash left over–$10K minus $12K equals $2K paid out before any further calculations take place!

Tax planning strategies

• Pay attention to tax rates. The more you earn, the higher your tax bracket is likely to be–and the more you’ll pay in taxes.
• Keep track of deductions. In addition to a standard deduction (which everyone receives), other beliefs may apply to you: medical expenses, charitable contributions, and mortgage interest are just some examples.
• Consider tax credits instead of tax deductions if they use because they’re worth more than regular deductions but don’t reduce your taxable income like standard or itemized deductions do; this means fewer dollars go toward paying off Uncle Sam each year!
• Think about how much money you expect to receive after filing your return versus how much money shows up on paper when doing calculations like these above since refunds aren’t always guaranteed even if all goes well during filing season due to their being dependent upon several factors including whether or not someone qualifies for certain credits/deductions (e..g., Earned Income Tax Credit).

W-4 form

You can see how your pay will be affected by the information in your W-4 form by using the paycheck calculator on the IRS website. To use it, enter your gross payment (the amount before taxes), federal income tax withheld, and a number of withholding allowances on line 7a. Then input state income tax withheld if applicable and click “Calculate” to see how much money is taken out of each paycheck for federal taxes, state taxes if applicable, and any other deductions from each paycheck

Understanding how your paycheck is calculated can help you know what to expect.

You can use this information to help you plan for taxes, understand your financial situation and calculate how much take-home pay you’ll receive each paycheck.

To calculate the federal tax on your paycheck:

• Take the gross amount of income (before any deductions) from your last payment. This is found in Box 1 of Form W-2, “Wage and Tax Statement.”
• Subtract any pretax deductions such as 401(k) contributions or health insurance premiums paid by an employer that was withheld from your wages during the year. The amount should be shown on Line 7a of Form 1040 or Line 28a of 1040A; if not included here, then another form may have been used instead (such as 1099).
• Multiply this difference by 0%, 15%, or 25%, depending on whether you’re single or married, filing jointly with one exemption; these rates apply only if all taxable income falls within specific ranges specified by law–see below for details!

Conclusion

By understanding how your paycheck is calculated, you can better plan for the expenses and taxes that come with it. You can also reduce your tax burden by planning and following the advice in this article.