Reviewing paycheck deductions
When you receive a paycheck, some funds are usually deducted for taxes. Most people pay four basic kinds of taxes:
1. FICA. These taxes are paid because of a law called the Federal Insurance Contributions Act. FICA taxes are contributions you make to Social Security and Medicare. You pay 6.2% of your income to Social Security and 1.45% to Medicare. The good news is that your total FICA contribution is really 12.4% to Social Security and 2.9% to Medicare. However, if you’re employed, your employer pays half of these taxes for you.
2. Federal income tax. These taxes are paid to the federal government. They are calculated as a percentage of your income. For federal taxes, the more you earn, the higher the percentage you pay. Currently federal tax rates range from 10% to 35%.
3. State income tax. These taxes are paid to your state government. They may be calculated in different ways, depending on the state you live in. Some states calculate state taxes as a flat percentage of your federal tax. Other states calculate your tax as a percentage of income.
4. Local tax. Some individuals may also pay local taxes. These taxes vary depending on the city you live in. Some cities charge income taxes; others do not. Some cities may charge an “occupational tax,” which you pay for the privilege of working in that city.
To figure out what your paycheck will look like after taxes are taken out, use the online financial calculator "Paycheck Analyzer".