Understanding Your Paycheck — What’s All That’s Taken Out?

It’s payday! Everybody’s favorite day.

But wait…what’s that? Who’s FICA? Why do they get a chunk of my money?

Federal Taxes

The first thing you notice is the fact that there is federal income tax taken out of your taxable income (after exemptions, and other deductions like contributing to retirement, and health insurance). This calculator by Smart Asset is a really nifty tool you can use to calculate the taxes that will be taken out of your paycheck. Now, why do you have to pay federal income tax? What does it contribute to?

The roads you drive on, the libraries you use, the government services you utilize, all of these things are paid for by these taxes. You are also contributing to the pay of government employees, such as police and firefighters. From the 3.3. billion dollars collected in taxes every year (both Federal and FICA), the majority of your taxes here go to fund Social Security. The next biggest expense is defense and international security. Contrary to popular belief, the amount of taxes taken out to fund safety net programs (such as food stamps and low-income housing assistance) account for less than 10% of your total tax.


The next thing, is the FICA guy taking all your money! But wait, what’s FICA?

FICA stands for Federal Insurance Contributions Act. This is a mandatory payroll tax that funds Social Security and Medicare specifically. Social Security is a benefit you receive at retirement, when  you have contributed for a determined amount of time. In 2016, the monthly retirement benefits averaged $1,360 distributed among 41 million retired workers.

The other half of FICA funds programs like Medicare, Medicaid, and CHIP. Medicare provides health coverage to around 57 million people who are over the age of 65 or have a disability. Medicaid is a separate program that provides health coverage to low-income people. CHIP is a program specifically targeted at providing health coverage for children.

The amount of FICA taxes withheld will vary, because it’s not a set amount, but a percentage of your paycheck. Social Security tax is 6.2%, and Medicare is 1.45%, totaling 7.65% of your paycheck going to FICA. When you contribute to FICA, your employer does too.

Other Taxes

Texas does not have state income tax, and we also do not pay any local income tax, besides the regular sales tax. If you move to another state to work, you might see other taxes taken out you might have not seen in Texas.

Probably you right now.

One cannot escape paying taxes (the IRS doesn’t take kindly to this), so keep this in mind when you are looking for a new job–the proposed pay will not be the same as your take home!

Learn More

Did you know iGrad, our online financial education platform, has a course on understanding your paycheck? Click here to register for iGrad (free for ACC students!) and start learning!