Understanding your US paycheck

FICA — Social Security and Medicare — is the flat part. You pay 6.2 percent of wages toward Social Security up to an annual wage cap that rises each year, and 1.45 percent toward Medicare with no cap at all. Your employer pays the same amounts again, which is real compensation you never see. High earners pay an additional Medicare surtax above a threshold.

Self-employed people pay both halves as self-employment tax, though half of it is deductible against income tax — one reason contractor rates should exceed employee salaries for the same work.

Federal income tax withholding is an estimate, not a fixed rate. Your employer calculates it from your Form W-4, your pay frequency and IRS tables, aiming to land close to your actual annual liability. Because the system is marginal, a bonus or overtime cheque can be withheld at a higher apparent rate and then reconciled when you file — one of the most common sources of confusion.

State income tax follows the same withholding logic. Nine states have none — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — and a handful of cities including New York City and Philadelphia levy their own on top. Some states also withhold for disability or paid family leave programs.

If you live in one state and work in another, both may claim withholding; reciprocity agreements between neighboring states often resolve it, and the annual return settles the rest.

Pre-tax deductions come out before income tax is calculated, so they lower your taxable income: health, dental and vision premiums; contributions to a traditional 401(k); Health Savings Account or Flexible Spending Account contributions; and often commuter benefits.

This is why a $100 health premium costs less than $100 of take-home pay — the deduction reduces the income you are taxed on. The same is true of a traditional 401(k) contribution, which is the single most efficient thing most employees can do with a dollar of salary.

The employer 401(k) match is free money and the most commonly forfeited benefit in American employment. If your employer matches contributions up to a percentage of salary, contributing less than that percentage is declining part of your compensation. Check the match, and check the vesting schedule — matched funds sometimes belong to you only after a period of service.

Post-tax deductions come out after tax: Roth 401(k) contributions, some insurance products, union dues, and wage garnishments if any.

Health Savings Accounts, available with high-deductible health plans, are the most tax-advantaged account in the US code — deductible going in, growing untaxed, and tax-free for medical spending. If you are offered one, it is worth understanding properly.

Check the year-to-date columns rather than the current period — they are what your tax return reconciles against, and errors compound quietly across a year.

Verify your hours and rate, especially if you are non-exempt and entitled to overtime at time and a half over 40 hours a week. Misclassification as exempt or as an independent contractor is one of the most common wage violations in the country.

Check that FICA is actually being withheld. If it is not and you are an employee, something is wrong — commonly, you have been misclassified as a contractor, which shifts both halves of the tax onto you along with the loss of unemployment insurance and workers' compensation.

Keep your final stub of the year: it should reconcile with the Form W-2 your employer must send by January 31, and discrepancies are far easier to raise while the payroll team still remembers.

Use the IRS Tax Withholding Estimator, which asks for your current stub and tells you what to change. It is the only reliable way to do this — the W-4's own worksheets are notoriously easy to get wrong when there are two incomes.

Submit a new Form W-4 to your employer at any time; you are not limited to hiring or January. Withholding adjusts from the next pay run.

Redo it after anything that changes your tax picture: marriage, divorce, a child, a second job, a spouse starting work, a large bonus, or buying a house.

Two earners in a household is the classic under-withholding trap: each employer withholds as though its salary were the household's only income, and the combined liability lands higher than the sum of the two withholdings. The estimator handles this correctly; the paper worksheet often does not.

If you owe a large amount at filing time, you may face an underpayment penalty — but safe harbor rules protect you if you paid at least what you owed last year, or 90 percent of this year's liability. Adjusting mid-year is usually enough to stay inside them.

If you are consistently getting a large refund, you are over-withholding. Reducing it raises your monthly take-home rather than your annual total.