U.S. federal law says your employer must take federal income tax and FICA taxes out of your paychecks, unless you’re excluded from withholding. Depending on your state and local jurisdiction, related withholding might apply. Many employers include payroll tax deductions on employees’ pay stubs. Still, it helps to know which ones you’re liable for, especially if your employer does not break down the information on the pay stub.
The Federal Insurance Contributions Act (FICA) authorizes the collection of Social Security and Medicare taxes. While most employees must pay Social Security and Medicare taxes, a few employees are exempt. This includes nonresident aliens, members of certain religious groups and students employed at a school they’re enrolled in. Your employer withholds Social Security tax at 4.2 percent of your taxable earnings up to $110,100 for the year, and Medicare tax at 1.45 percent of all your taxable wages, as of time of publication.
Federal Income Tax
You must pay federal income tax unless an exemption applies. Check the current year’s W-4 form for exemption requirements. To calculate federal income tax withholding, your employer uses your W-4 and IRS Publication 15’s tax-withholding tables. Your employer must give you a W-4 to complete when you are hired so you can state your withholding conditions on the form. Completing the form helps to ensure that the right amount of tax is taken out of your paychecks.
State Income Tax
If you live in any state besides Alaska, Tennessee, Florida, New Hampshire, Nevada, Texas, South Dakota, Wyoming or Washington, you must pay state income tax. Each state has specific withholding rules that employers must abide by for resident and nonresident employees. You're a resident of the state in which your main home is located for the entire tax year; you're also subject to the income tax laws of that state. If you live in one state, but work in another, and those states have a reciprocity agreement between them, your employer withholds state income tax according to the laws of your home state. You would also file a tax return in your home state come tax time. If the states do not have a reciprocity agreement between them and both states have an income tax, you pay and file income tax in both states.
Less commonly, an employer is required to withhold other types of taxes from employees’ paychecks. This may include local income tax such as Pennsylvania’s earned income tax, and state unemployment tax such as in New Jersey. Whereas state income tax is enacted by the state government, the local government such as the city or county enacts local income tax. If you work for a railroad employer, federal law says your employer must take Tier 1 and Tier 2 railroad retirement taxes out of your paychecks.
Employers pay FICA taxes, federal income tax and railroad retirement tax withholding to the IRS. You may review the agency’s Publication 15 for calculation, payment and reporting guidelines your employers must follow. Contact the state taxation agency and your local tax assessor for state and local tax-withholding policies, if applicable.
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- IRS.gov: Excess Social Security and RRTA Tax Withheld
- Intuit: Who is Exempt From Paying Social Security Tax?
- IRS.gov: States Without a State Income Tax
- Gaebler: State Income Tax Reciprocal Agreements
- Planet Payroll: Multi-State Taxation Issues
- IRS.gov: Medical Resident FICA Refund Claims (MR Claims)