How Are Taxes Deducted From Your Paycheck: W-4, Withholding, and Bonuses

Taxes are deducted from your paycheck in four layers: federal income tax based on the W-4 you filed, a 6.2% Social Security tax, a 1.45% Medicare tax, and (in most states) state and often local income tax. Your employer runs those calculations every pay period using IRS withholding tables and flat statutory rates, then deposits what’s left. The United States uses a pay-as-you-go system, so the money comes out of each check throughout the year rather than in one bill at tax time.1Internal Revenue Service. Estimated Taxes

The Taxes That Come Out of Every Paycheck

Three federal taxes hit almost every W-2 paycheck, and a fourth applies in most states.

Federal income tax is calculated on a sliding scale using progressive brackets. The amount withheld each pay period depends on your gross pay, the filing status and adjustments on your W-4, and any pre-tax deductions that reduce your taxable wages.

Social Security tax is a flat 6.2% of gross wages up to an annual earnings cap of $184,500 in 2026. Once your year-to-date earnings cross that ceiling, withholding for Social Security stops for the rest of the year. The maximum you can pay in 2026 is $11,439.2Social Security Administration. Contribution and Benefit Base

Medicare tax is 1.45% on all wages with no cap. If your wages pass $200,000 in a year, your employer withholds an additional 0.9% on the amount above that threshold, regardless of your filing status. You reconcile any difference between what was withheld and what you actually owe on your return.3Office of the Law Revision Counsel. 26 USC Chapter 21 – Federal Insurance Contributions Act – Section 3101 Rate of Tax

Together, Social Security and Medicare are called FICA taxes. Your employer matches your 6.2% and 1.45% contributions dollar for dollar, though the match doesn’t appear on your pay stub.

State and local income tax is the fourth layer. About 41 states tax wage income, with rates ranging from flat taxes under 3% to graduated rates above 10%. Nine states levy no income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Some cities and counties also impose local income tax, which can add roughly 1% to over 3% on top of the state rate. If you work in one jurisdiction and live in another, both may claim a piece, though most states offer credits to prevent full double taxation.

How Your W-4 Controls Federal Income Tax Withholding

Form W-4, the Employee’s Withholding Certificate, is the document that tells your employer how much federal income tax to withhold from each check.4Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate The form has five steps, but only Step 1 (personal information and filing status) and Step 5 (signature) are mandatory. If you stop after those, withholding is calculated using the standard deduction for your filing status and the normal tax rates with no other adjustments.5Internal Revenue Service. FAQs on the 2020 Form W-4

The three filing status options are Single or Married Filing Separately, Married Filing Jointly, and Head of Household.6Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods Each carries a different standard deduction. For 2026, that’s $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A larger standard deduction shields more income from tax and lowers the amount withheld each pay period.

The optional steps give you finer control:

  • Step 2 adjusts for a second job or a working spouse.
  • Step 3 lets you claim the Child Tax Credit, currently worth up to $2,200 per qualifying child under 17, which directly reduces the tax withheld.8Internal Revenue Service. Child Tax Credit
  • Step 4 handles other income (freelance work, investment income), itemized deductions that exceed the standard deduction, and any extra dollar amount you want withheld each pay period.

If You Never Submit a W-4

Your employer doesn’t guess. IRS rules require them to withhold as if you checked Single or Married Filing Separately with no other adjustments.6Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods That produces close to the highest possible withholding for your income, so paychecks will be smaller until you turn in the form.

Claiming Exemption

You can claim complete exemption from federal income tax withholding only if you had zero federal income tax liability last year and expect zero this year.6Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods This mostly fits low-income workers and students whose earnings fall below the filing threshold. Claiming exemption without qualifying sets up a large tax bill in April. Exemption applies only to federal income tax; Social Security and Medicare still come out.

How the Federal Income Tax Calculation Actually Works

Federal income tax uses progressive brackets. Your income is sliced into segments and each segment is taxed at its own rate. Someone earning $60,000 doesn’t pay 22% on the whole amount; they pay 10% on the first slice, 12% on the next, and 22% only on the portion that reaches into the third bracket.

For 2026, a single filer’s brackets are:7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026

  • 10% on taxable income up to $12,400
  • 12% from $12,401 to $50,400
  • 22% from $50,401 to $105,700
  • 24% from $105,701 to $201,775
  • 32% from $201,776 to $256,225
  • 35% from $256,226 to $640,600
  • 37% on income above $640,600

For married couples filing jointly, each bracket is roughly double the single-filer threshold through the 32% bracket. These brackets apply to taxable income, meaning your gross pay minus pre-tax deductions and the standard deduction. Your employer’s payroll system builds the standard deduction into the calculation automatically based on the filing status on your W-4.

Employers use one of two IRS-approved methods from Publication 15-T: the wage bracket method (a lookup table based on pay range and filing status) or the percentage method (a formula).9Internal Revenue Service. About Publication 15-T, Federal Income Tax Withholding Methods They produce similar results; the percentage method just handles a wider range of incomes and more complex W-4 entries.

Pre-Tax Deductions That Shrink What Gets Taxed

Certain deductions come out of your gross pay before some or all of the tax calculations run. They’re the most direct lever you have on your paycheck.

Traditional 401(k) contributions are the common example. In 2026, you can defer up to $24,500 into a traditional 401(k), or $32,500 if you’re 50 or older.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 Those dollars are excluded from federal income tax withholding. There’s a catch, though: 401(k) deferrals still count as wages for Social Security and Medicare, so FICA is calculated on your full gross before the 401(k) money comes out.11Internal Revenue Service. 401(k) Plan Overview

Health insurance premiums paid through an employer’s cafeteria plan (a Section 125 plan) do better. They avoid both federal income tax and FICA, so they trim your Social Security and Medicare withholding as well.12Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans Health savings accounts and flexible spending accounts offered through a cafeteria plan work the same way.

Roth 401(k) contributions are the opposite. They come out after income tax is calculated, so they don’t reduce your current withholding at all.11Internal Revenue Service. 401(k) Plan Overview The tradeoff is tax-free withdrawals in retirement.

The Order Your Payroll System Runs

The sequence matters, because different deductions reduce different tax bases. Every pay period, the calculation typically runs like this:

  1. Start with gross pay: salary, hourly wages, overtime, and any other compensation for the period.
  2. Subtract cafeteria plan deductions (health premiums, HSA, FSA). These reduce both the income tax base and the FICA base.
  3. Calculate FICA on what remains: 6.2% Social Security (up to the $184,500 cap) and 1.45% Medicare, plus the 0.9% Additional Medicare Tax on wages over $200,000. Traditional 401(k) deferrals do not reduce this figure.
  4. Subtract traditional 401(k) and similar pre-tax deferrals. These reduce the income tax base only.
  5. Calculate federal income tax using the bracket-based tables in Publication 15-T, applied to the reduced taxable amount and the standard deduction tied to your filing status.
  6. Calculate state and local income tax, if any, on the reduced income base using your state’s tables.
  7. Subtract post-tax deductions such as Roth 401(k) contributions and union dues.
  8. What remains is your net pay.

Two employees with the same gross pay and the same total deductions can end up with different net pay depending on how each deduction is classified in that order.

How Bonuses and Other Supplemental Pay Are Taxed

Bonuses, commissions, and other supplemental wages don’t run through the same bracket calculation as your regular check. When supplemental pay is issued separately, most employers use the flat-rate method: 22% federal income tax withheld off the top, with no W-4 adjustments. If your total supplemental wages for the year pass $1 million, the portion above that threshold is withheld at 37%.13Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide

FICA still applies to supplemental wages at the normal rates. The 22% flat figure only replaces the income tax piece, not Social Security or Medicare.

Some employers use the aggregate method instead, which combines your bonus with your regular pay for the period and runs the total through the standard withholding tables. That often produces higher withholding because the combined amount pushes more income into higher brackets. Any over-withholding comes back as part of your refund when you file.

Checking the Math on Your Pay Stub

Every pay stub should show each deduction as a separate line: federal income tax, Social Security, Medicare, state and local taxes, and any pre-tax items like 401(k) contributions or health premiums. That separation makes it possible to verify the calculations yourself against the rates above.

At year’s end, your employer reports the totals on Form W-2, which must be delivered to you by February 1, 2027 for the 2026 tax year. Box 2 shows federal income tax withheld, Box 4 shows Social Security, and Box 6 shows Medicare.14Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) If any figure doesn’t match what your pay stubs showed, raise it with payroll before filing.

If your withholding feels off (a large refund last year, or a large balance due), the IRS Tax Withholding Estimator at irs.gov walks you through your income, deductions, and credits to recommend the right W-4 entries.15Internal Revenue Service. Tax Withholding Estimator A $3,000 refund is a $250-per-month interest-free loan to the government. A $3,000 balance means you underpaid all year and could owe a penalty. Running the estimator after a marriage, new child, second job, or a spouse starting or stopping work takes about 15 minutes, and any change you want takes effect through a new W-4 to your employer.