Why Are All Those Taxes Taken Out of My Paycheck?

Most of us are just a couple weeks out from having our social feeds flooded with "last day of school" pics. For many teenagers, this means they're just a couple weeks away from their first summer job.

And boy, are some of them in for an unpleasant surprise.

Not the job itself! While we can't speak for everyone, the Young and the Invested workplace consensus is that our high school and summer gigs were A-OK. It was work, but it was good work, the pay was fine for the lack of obligations we had, and our coworkers were generally pretty fun to be around.

No, the unpleasant surprise will be the bittersweet taste of receiving your initial paycheck.

Remember the emotional rush on your first payday? You were bringing in honest-to-goodness money—which meant you could do some honest-to-goodness spending. But then your eyes rolled from the number describing how much you earned down to the number describing how much you were actually paid … and suddenly, you had the bizarre urge to drive to the nearest import terminal and chuck some Twinings overboard.

By the way: No matter your political views as it pertains to taxes, the shock of actually seeing that number still hits long after your teenage years. Find someone who got a big promotion or took a big step up by changing employers, and ask them about their first paycheck at the new job. They'll tell you they loved seeing the larger top- and bottom-line numbers … but couldn't help recoiling a bit when they saw what was taken out in between.

Anyways, depending on how much you make, where you live, and certain other factors, it's not uncommon to have 10%, 20%, 30%, or more withheld from your paycheck for taxes.

That can be a hard pill to swallow—for teenagers and adults. You work hard for your money, so it stings when such a large chunk is taken away and sent to the government.

Young and the Invested Tip: Are you a teen and still looking for work? Or is your teenage kid still searching? Check out our list of summer job ideas.

But your frustration level might come down a bit if you understand why those taxes are taken out of your pay and how they're calculated. It might also help to know that you could get some of that money back next year in the form of a tax refund, or even benefit from the taxes you paid down the road when you retire.

What to Know About the Different Payroll Taxes

Here's a quick rundown of the various taxes that are taken out of your paycheck. Some of these taxes will apply to everyone, regardless of your age or how much you earn, while certain taxes are likely only going to apply to higher-income adults.

Federal Income Tax

The federal income tax system operates on a "pay as you go" basis. In other words, Uncle Sam wants to be paid when you get paid … and it's your employer's responsibility to withhold income taxes from your paycheck and send it to the IRS. 

The U.S. government uses this money to pay for all sorts of things, from national defense and federal law enforcement, to food stamps and education programs.

How much federal income tax is taken out of your pay is determined by the information you include on the W-4 form you submit to your employer when you start a new job. (You can also change the withholding by completing another W-4 form later.) The amount is based on a variety of factors, including your tax filing status, family size, how many jobs you have, whether your spouse works, tax deductions and credits you expect to claim, and more. It's a complicated calculation, but the IRS has an online tool that can help you fill out a W-4 form and get your withholding right.

Young and the Invested Tip: Want to invest in your teen's future? One of the best ideas to consider is opening up a custodial account.

Ideally, the federal income tax withheld from your pay this year will be close to the actual tax liability shown on the federal income tax return you'll file next year. Don't expect your withholding and actual tax to match up exactly (there are too many factors making that difficult).

However, you want to avoid a wide gap so you're not paying the IRS too much next year when you file your return if withholding is less than your actual tax liability, or getting a tax refund that's too large if withholding is greater than your actual tax liability. (If you get a refund, you essentially gave Uncle Sam an interest-free loan!)

State and Local Income Tax

States and local governments need tax revenue, too. So, unless you live in a state with no income tax on wages—that's Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming—then you can also expect to have state income taxes withheld from your paycheck. Some people will have local (county or city) income taxes taken out of their wages as well.

These taxes pay for schools, local police and firefighters, roads, libraries, community support, and the like. 

The amount of state or local income taxes withheld is literally all over the map. If you want specifics, check with the state tax agency or local tax collector where you live.

Social Security Tax

The Social Security benefits you receive in retirement are funded with a Social Security payroll tax. The tax is officially called the Old-Age, Survivors, and Disability Insurance (OASDI) Tax, and it's authorized by the Federal Insurance Contributions Act (FICA).

Your employer withholds 6.2% of your pay for the Social Security tax. However, your employer also has to pay 6.2% out of its pocket, for a total of 12.4% of your pay going toward your retirement benefits.

There's a limit on this payroll tax, though. Because of what's known as the Social Security tax "wage base," there's no tax on wages exceeding a certain amount. For 2026, the wage base limit is $184,500 (it's adjusted each year for inflation).

So, for example, if you earn $200,000 this year, only the first $184,500 is subject to the Social Security tax. The remaining $15,500 is tax-free. (And if you think paying taxes for a program that might not exist as it currently does when you retire is annoying, it gets worse. In many cases, your Social Security benefits are taxable when you start withdrawing.)

Young and the Invested Tip: Check out our tips for avoiding taxes on your Social Security benefits.

Medicare Tax

There's another FICA tax taken out of each paycheck: the Medicare tax (a.k.a., the hospital insurance tax). As you might guess, this tax helps pay for the Medicare health care system for retirees.

As with the Social Security tax, both you and your employer pay the Medicare tax—each paying 1.45% of your wages (2.9% total). However, unlike the Social Security tax, there's no limit on the amount of wages subject to the Medicare tax.

If you earn at least $200,000 ($125,000 married filing separately, $250,000 married filing jointly), you'll also be subject to the 0.9% Additional Medicare tax, which is also withheld from your paycheck. However, the tax only applies to earnings over $200,000, so withholding won't begin until your employer has paid you at least $200,000 for the year.

As a result, you could owe more tax than what's withheld. If that's the case, you might want to make estimated tax payments or submit a new W-4 form to request additional tax withholding in order to cover the shortfall.

On the other hand, if you're married and file a joint tax return, you ultimately might not owe the additional Medicare tax since the first $250,000 of wages is exempt for joint filers. In that case, you could get a tax refund for any additional Medicare tax withheld from your paycheck.

Unemployment Taxes

Finally, there's one more payroll tax worth mentioning: the unemployment tax. It's authorized by the Federal Unemployment Tax Act (FUTA), and it pays for unemployment benefits for workers who lose their job.

However, you don't have to pay the FUTA tax—it's only paid by employers. Most employers pay a state unemployment tax, too.

The federal unemployment tax rate is 6%. However, it only applies to the first $7,000 of your wages for the year. State rates and wage limits vary.

Again, you don't have to worry about unemployment taxes, but it's worth noting in case you see it listed on your pay stub.

So there you have it! Those are the payroll taxes based on your wages. (And remember: Other payroll deductions are possible as well, such as for health insurance, retirement savings, union dues, and other payments.) 

Payroll taxes can certainly add up, and no one really likes paying them (like all taxes). But grit your teeth and get used to them—they're a fact of life for anyone in the workforce.

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Thank you for spending some of your weekend with us! We'll talk to you again next week.

Riley & Kyle

Young and the Invested

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