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Why Is My Check So Small After Taxes?

Updated for Tax Year 2020


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.


Man checking his account balance at an ATM.

Payroll deductions perform a valuable service: Without them, taxpayers would be responsible for figuring out how much of their paycheck is withheld 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 to 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.

Federal deductions

The largest withholding is usually for federal income tax. The amount taken out is based on your gross income, your W-4 Form, which describes your tax situation for your employer, and a variety of other factors.  Other federal deductions fund Social Security and Medicare, which are part of the federal health care system 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 $137,700 in 2020. 
  • 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.

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.

How to change your take-home pay

If you're wondering what percentage 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.

Non-governmental paycheck deductions

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.

 

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