Taxes Explained: Federal, State, and Payroll Taxes

Your paycheck is smaller than your salary because several taxes come out of it, not just one. Federal income tax, Social Security and Medicare, and (in most states) state income tax each take their own slice. Once you know what each one is, your pay stub and your tax return start to make sense.

1. What are taxes?

Taxes are the money we all chip in to pay for shared things like roads, schools, the military, Social Security and Medicare.

There isn't one single tax rate, though. A few smaller taxes stack together, each with its own rules. Here are the ones most workers see:

Federal income tax goes to the U.S. government. The more you earn, the higher the rate on your top dollars.
Payroll taxes pay for Social Security and Medicare. They take a flat 7.65% of most paychecks.
State and local income tax depends on where you live. Most states have one, but a few don't.

You also pay taxes outside your paycheck. Sales tax is added when you buy things, and property tax is a yearly bill on a home or land you own. An excise tax is a tax built into the price of certain items, like gas, alcohol and cigarettes.

2. Federal income tax: from salary to tax bill

Federal income tax is figured on a yearly tax return, Form 1040. Four numbers matter most:

Gross income is all the income you earned: wages, bank interest, side-gig profit and so on.
Adjusted gross income (AGI) is your gross income minus a few special subtractions, like money you put into a traditional IRA or HSA.
Taxable income is what's left after you subtract your deductions. It's the number your tax is figured on.
Tax owed is the tax on your taxable income, minus any credits.

A deduction lowers the income you pay tax on. A credit takes dollars straight off your tax bill. Our guide to deductions vs. credits explains the difference.

The standard deduction

Most people take the standard deduction. It's a flat amount you subtract from your income without listing any expenses. Your amount depends on your filing status, the category you file under.

Filing status (2026)	Standard deduction
Single	$16,100
Married filing jointly	$32,200
Head of household (single parent or caregiver who pays most household costs)	$24,150

If you're 65 or older, you can also take a new extra deduction of up to $6,000 for 2025 through 2028. It shrinks once your modified AGI passes $75,000 (single) or $150,000 (married filing jointly).

Tax brackets

The U.S. uses progressive brackets. Your income is cut into slices, and higher slices are taxed at higher rates. For a single filer in 2026, the first $12,400 of taxable income is taxed at 10%. The next slice, up to $50,400, is taxed at 12%. The slice from there to $105,700 is taxed at 22%. Higher rates (24% up to 37%) apply only to dollars above that.

A raise never makes all your income taxed at a higher rate. Only the dollars in the higher slice pay the higher rate. Our tax brackets guide walks through this step by step.

Example: Jordan's full year

Jordan is single. He earned $80,000 in wages and $400 in bank interest, so his gross income is $80,400. He has no special subtractions, so his AGI is also $80,400.

He takes the $16,100 standard deduction. That leaves $64,300 of taxable income. His federal income tax works out like this:

10% of the first $12,400 = $1,240
12% of the next $38,000 = $4,560
22% of the last $13,900 = $3,058

His total is $8,858. That's about 11% of his income, even though his top bracket is 22%.

Your pay stub may call these FICA, which is just the label for Social Security tax plus Medicare tax. They're separate from income tax. The deductions on your tax return, like the standard deduction, don't lower them. (Some pre-tax benefits at work do, as you'll see in section 5.)

Here's how they work for employees in 2026:

Tax	You pay	Your employer pays	Limit
Social Security	6.2%	6.2%	Only on wages up to $184,500
Medicare	1.45%	1.45%	No limit
Additional Medicare Tax	0.9%	Nothing	Only on wages over $200,000

The $184,500 cap is called the wage base. Once your wages for the year pass it, Social Security tax stops until January, and for 2027 the wage base rises to $192,300. If you work two jobs, each employer withholds on its own and doesn't know about the other. So if your combined wages pass the wage base, you can end up paying too much Social Security tax. You get the extra back as a credit when you file.

Medicare has no cap, so every dollar you earn gets the 1.45%. Your employer starts taking out the extra 0.9% once your wages at that job pass $200,000. For married couples filing jointly, though, the tax really applies to combined wages over $250,000, and your return fixes any gap when you file.

Example: Maya earns $5,000 a month. Social Security takes 6.2%, which is $310. Medicare takes 1.45%, which is $72.50. Her employer pays a matching $382.50 on top, which she never sees on her stub. Since Maya earns $60,000 a year, well under the wage base, Social Security comes out of every check all year.

If you're self-employed

Freelancers and side-gig workers pay both halves themselves, through what's called self-employment tax. It's 15.3% (12.4% for Social Security plus 2.9% for Medicare), figured on 92.35% of your profit. You owe it once that figure reaches $400 for the year, and you can then deduct half of it when you calculate your income tax.

Example: Zoe makes $10,000 of profit from weekend photography. Her self-employment tax is $10,000 × 92.35% × 15.3%, or about $1,413. She owes income tax on that profit too. No one withholds it for her, so she has to plan for it herself (more on that in section 6).

4. State and local income tax

Most states tax your income, with their own forms, rates and rules. A deduction on your federal return may not count on your state return.

A handful of states have no tax on wages at all, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. If you live in one, your paycheck skips this line.

If you live in New York

New York State has its own income tax with its own brackets. You file a state return (Form IT-201 for full-year residents) along with your federal return.
New York City residents pay a separate city income tax on top of state tax. It's collected on the same state return.
Yonkers residents pay a Yonkers income tax surcharge too.
If you live in another state but work in New York, you'll usually file a New York nonresident return for the income you earned here.

New York's current rates and forms are posted by the New York State Department of Taxation and Finance. Look there before you plan around a state number.

5. Follow one paycheck from gross to take-home

Gross pay is what you earn before anything comes out. Net pay is what actually lands in your bank account. Some of the gap is tax, and some of it is benefits you chose.

Here's Maya's $5,000 monthly paycheck:

Line on her stub	Amount
Gross pay	$5,000.00
Federal income tax withheld	−$600.00
State and local income tax withheld	−$250.00
Social Security	−$310.00
Medicare	−$72.50
Health insurance premium	−$200.00
Net pay	$3,567.50

This example assumes her health premium comes out after tax. Many employers take premiums out before tax instead. Then Social Security, Medicare and income tax are all figured on $4,800, not $5,000, and Maya saves a little tax.

Notice that the health premium isn't a tax at all. The same goes for 401(k) contributions. They shrink your check, but the money is still yours or pays for your benefits.

The W-4 controls your withholding

Withholding is income tax your employer takes out of each check and sends to the IRS for you. You set it with Form W-4, a short form you fill out when you start a job.

The W-4 doesn't change how much tax you owe, only how much you prepay. You can file a new W-4 with your employer any time, for example after a marriage, a new baby or a second job. The free IRS Tax Withholding Estimator helps you fill it out.

6. Refunds, balances due and filing your return

Your withholding is a guess made during the year. Your tax return is where you reconcile, or compare what you paid with what you really owe.

If you paid in more than you owe, you get a refund.
If you paid in less, you have a balance due.

Example: Lena's final federal tax is $7,000. Her employer withheld $8,500, so she gets a $1,500 refund. If only $6,000 had been withheld, she would owe $1,000 instead. Her tax was $7,000 both times. Only the prepayment changed.

So a big refund doesn't mean you paid less tax. It means you lent the IRS money all year, interest free. Some credits are refundable, which means they can pay you even if you owe no tax. That's the one way a refund can be bigger than what you paid in.

Estimated tax

If no one withholds for you, as with freelance income, you send the IRS estimated tax yourself. Payments are due four times a year. Most people need to make them if they expect to owe $1,000 or more when they file.

Key forms

W-2: your employer's yearly summary of your wages and the taxes withheld.
1099-INT: interest a bank paid you.
1099-NEC: money a client paid you for freelance work.
Schedule C: the form where you report profit from a one-person business.
Form 1040: your main federal return. Everything comes together here.

Deadlines

Your 2026 federal return is due April 15, 2027. If you need more time, you can file for an extension (Form 4868) to October 15, 2027. An extension gives you more time to file, not more time to pay. Any tax you owe is still due in April.

Can't pay it all? File on time anyway. The penalty for filing late is 5% of the unpaid tax for each month or part of a month, up to 25%. The penalty for paying late is much smaller, at 0.5% a month (also capped at 25%), and the IRS offers payment plans.

Common mistakes

Treating a refund as a bonus. It's your own money coming back. A smaller refund with bigger paychecks can help your budget more.
Forgetting tax on side income. A 1099-NEC job has no withholding. Set aside money for income tax and self-employment tax from every payment.
Never updating your W-4. A new job, marriage, baby or second job can leave you way off. Recheck with the IRS estimator after any big change.
Mixing up taxes and benefits on your stub. A 401(k) contribution or health premium isn't a tax.
Thinking a raise lowers your take-home pay. Only the dollars in the new bracket pay the higher rate.
Skipping the state return. New York and most other states need their own return, even if you owe nothing federally.

Frequently asked questions

Is my paycheck withholding my final tax bill?

No. Withholding is a prepayment. Your tax return calculates your real bill for the year and settles the difference.

Why is my withholding different from my coworker's?

You may have filled out your W-4s differently, picked different benefits, or earned different amounts. A coworker who put more into a pre-tax 401(k) will also have less income tax taken out.

You pay it on every paycheck, at any age, as long as you have wages. The only break is the wage base. Once you earn $184,500 in 2026, it stops for the rest of that year.

When will the 2027 tax brackets come out?

The IRS posts new brackets and standard deductions each fall. The 2027 numbers weren't out as of early November 2026. We update our guides when they are.

Does everyone have to file a federal return?

No. Whether you must file depends on your income, filing status and age. If your income is below your standard deduction, you often don't have to. One big exception: if you have $400 or more of self-employment earnings, you must file. Filing can also pay off if you had tax withheld or qualify for a refundable credit.

The bottom line

Your paycheck shrinks because of a few different taxes, each with its own rules. Federal income tax depends on your taxable income and brackets. Social Security and Medicare are flat rates on your wages. State tax depends on where you live. Learn which is which, keep your W-4 current, and file by April 15 so there are no surprises.

Authoritative sources

Convivial Wealth education guide · General education for U.S. readers, not personalized tax, legal or investment advice. Figures are for 2026 and are reviewed each year.

Read our full educational disclaimer.