Understanding Paycheck Deductions in the United States


A significant portion of the revenue collected by the federal government and some states comes from payroll deductions; these withholdings help to fund the national budget as well as Social Security, Medicare and other programs that benefit American society.

Various factors determine how much money is taken out from each paycheck, and the first is the jurisdiction. There are seven states where individuals are not assessed personal income tax, and thus they do not see this particular withholding item on their paycheck statements:

South Dakota

In addition to the above, Tennessee and New Hampshire only tax personal income based on money earned from investments and dividends, which means that wage and salary employees who get paychecks will not see state deductions from their earnings.

Other factors that will determine paycheck deductions include:

* Marital status
* Citizenship or foreign worker status
* Withholdings authorized on revenue forms
* Contributions to retirement accounts
* Health insurance
* Child support and collections enforcement

With the above in mind, the deductions breakdown will include the following:

* Federal Income Tax: This is determined by the W-4 form that must be completed by all employees.

As of January 2018, the rules for withholdings and allowances have been changed to reflect the tax reform packaged approved by the Trump administration. According to tax preparation giant H&R Block, a single taxpayer without dependents who earns $50,400 per year, and who reasonably claims two allowances on his W-4 form, would see a total of $4,418 withheld during the year. Assuming he gets a paycheck on the 1st and 15th of every month, he would see two withholdings of $242 and 22 withholdings of $185; the variance of the amounts is because the new rules were implemented in mid-January 2018.

* Federal Insurance Contributions Act: This deduction is set at 6.2 percent for taxpayers who earn up to $117,00 per year plus 1.45 percent for all workers regardless of their earnings rate. The 6.2 percent goes to the Social Security Administration and the 1.45 percent goes to medicare.

* State and Local Taxes: Depending on where individuals work and reside, they may see state or municipal deductions from their earnings.

* Health Insurance: Workers who comply with individual mandate of the Affordable Care Act via their employers’ health insurance plans will see paycheck deductions in this regards.

* Retirement Accounts: These deductions are typically for 401(k) and IRA plans, which are set up for savings and investments towards retirement planning.

* Child Support Enforcement: Some workers may elect to pay for child support obligations directly from their paychecks, or they may be ordered to do so by a court or state agency.

* Collections Enforcement: Some creditors may go after paychecks as a form of debt collection through a court order that complies with state law.