How Much in Taxes Is Taken Out of Your Paycheck?
Where does the money go, and what is it used for?
If you're making money, chances are you'll have to pay taxes on it. In fact, Uncle Sam takes a decent-sized chunk of your paycheck before it even hits your bank account. Before you sign a lease or nail down your budget, you’ll need to figure out your "take-home pay," or the amount of your hard-earned money that will actually end up in your pocket.
In this article, we’ll answer two questions: How much can you expect to pay in taxes, and just what is that tax money used for?
Let’s say you got a new job that pays $20/hour. That works out to $800 per week, $3,200 per month, and $41,600 per year--pretax. How much of that can you expect to take home after taxes?
Federal income tax is the government’s biggest source of revenue. It is used to pay the country’s ongoing expenses, such as national defense, infrastructure needs, social assistance programs, and paying interest on the national debt.
Many people are surprised to learn that all of the income you make is not taxed at one rate. Let’s say you are the single filer in the example above, earning $41,600 per year. Your income falls into the 22% tax bracket. But, if you paid a flat 22% tax rate, you'd owe $9,152. Yikes. What gives?
Federal income taxes are paid in tiers. For a single filer, the first $9,875 you earn is taxed at 10%. The next $30,249 you earn--the amount from $9,876 to $40,125--is taxed at 15%. Only the very last $1,475 you earned would be taxed at the 22% rate. This IRS Tax Table can help you figure out how much federal income tax you owe.
Social Security and Medicare withholding are also known as FICA. You pay 6.2% of your salary up to the Social Security wage cap, which is $142,800 for 2021, and 1.45% in taxes for Medicare (note that there is no wage cap for Medicare tax). When you work for a corporation, these taxes are matched by your employer, for a total tax paid of 12.4% of salary up to the Social Security wage cap and 2.9% Medicare tax. When you're self-employed, you pay both halves yourself. Also, if your yearly salary is $200,000 or more, you will have to pay an additional 0.9% in Medicare tax.
Social Security is a U.S. government program that provides federal aid to Americans. It includes many federal aid programs: unemployment assistance, disability assistance, Medicaid, and so on. One of the largest Social Security programs is retirement benefits. For many Americans, retirement benefits are a crucial piece of their retirement income.
Eligibility for retirement assistance through Social Security involves accumulating 40 Social Security Credits. Because four credits can be earned in most every year, Americans will need to work for at least 10 years to be eligible. Social Security benefits include survivor benefits. If the immediate beneficiary passes away, eligible family members may receive the benefits in their place.
Medicare is the federal health insurance program for people who are 65 or older. Though Medicare benefits likely will not cover every medical service and prescription a person may need, this taxpayer-subsidized program helps people manage medical costs as they age.