The 2017 Social Security withholdings total 12.4 percent and Medicare withholding rates total 2.9 percent, according to the IRS. An employer withholds these funds from the paycheck as well as income taxes and other deductions.
When first hired at a job, employees fill out several forms. One of these forms is a W-4, which dictates how much money to withhold and pay to the federal government. The amount paid varies depending on how much an employee earns and how many allowances they claim. Claiming zero allowances results in the maximum amount withheld from a paycheck. The more allowances claimed, the lower the amount withheld. If more money is withheld than necessary, then the employee may be eligible for a refund when they file an income tax return. Depending on the location, state and local taxes might also be withheld.
Federal Insurance Contributions Act (FICA) taxes are also listed as a deduction on a paycheck. This tax consists of two parts. The first being Social Security, which is a federal program designed to provide citizens with an income after retirement. In order to fund this program, the government withholds a percentage of earnings. For 2017, the Social Security withholding rate is 6.2 percent for employer and employee, or 12.4 percent total, as stated by the IRS. The wage base limit is $127,200, meaning that only wages up to that amount are subject to the Social Security tax.
The second part of the FICA tax is Medicare, which is health insurance for citizens ages 65 and older. Just like with Social Security, a certain amount of earnings are withheld in order to fund the program. For 2017, the Medicare withholding rate is 1.45 percent for employer and employee, or 2.9 percent total, states the IRS. Unlike Social Security, there is no wage base limit. However, employers are required to withhold an extra 0.9 percent additional Medicare tax if the employee's earnings exceed $200,000 for the calendar year.
401(k)s and Other Retirement Plans
While the above mentioned withholdings are mandatory, retirement plans, such as a 401(k) or 403(b), are optional. These tax-deferred programs are offered through an employer and taken directly from a paycheck. Employees have control over the amount that goes into the retirement savings plan. The more they contribute, the lower income tax withholding will be.
Health Insurance and Other Benefits
Many employers offer benefits, such as health, dental and life insurance. The premiums for these insurance programs are withheld from a check as a payroll deduction. The amount paid is dependent on the plan an employer offers and the type of coverage the employee selects. Employees are given the rates prior to enrolling in a program. Employer-sponsored health insurance programs are most often paid with pre-tax dollars, meaning that the premiums are deducted before calculating income taxes. Additionally, employees are not taxed on the amount that the employer pays toward insurance since this is not considered part of their wages.
When a person receives a paycheck, he or she find all of these calculations attached. The pay stub includes a breakdown of how many hours the employee worked for the pay period, the hourly rate and a list of all of the deductions so that the amount taken out of each paycheck can be seen.