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How Wages Work


Taxes
Taxes and other withholdings should be indicated on a pay stub like this one.
Taxes and other withholdings should be indicated on a pay stub like this one.

Say you just started a new job and got your first paycheck. You expected a certain amount, but this check is much smaller. What happened? Who is this FICA person, and why is he getting some of your money?

Employers are required by law to withhold some money from each paycheck in order to pay for certain taxes. These withholdings help pay for things like income tax, Social Security and Medicare.

Payroll Tax

Employers must withhold federal and state income taxes for employees. The amount withheld is based on a W-4 form, filled out by the employee, that states his or her filing status (single or married) and number of personal allowances claimed, such as the number of dependents.

Social Security Tax

Employers withhold 6.2 percent of the maximum taxable wage base, or the maximum dollar amount subject to Social Security taxes ($94,200 in 2006). The employer also contributes this same amount out of pocket to Social Security on your behalf. For example, let’s say you earn a salary of $45,000 a year. During the course of a year of your employment, your employer would withhold $2,790 from your paycheck and contribute an additional $2,790 for a total of $5,580 paid to Social Security. Assuming you are paid twice a month, that would mean $116.25 is subtracted from each paycheck for Social Security.

The information filled out in a W-4 form determines the amount of taxes withheld from an employee's paycheck.
The information filled out in a W-4 form determines the amount of taxes withheld from an employee's paycheck.

Other Taxes

Employers also pay 1.45 percent of wages for Medicare taxes and withhold 1.45 percent. Federal unemployment taxes are required for the first $7,000 paid to each employee, and some states require employers to pay state unemployment taxes. Unemployment tax rates vary among the states.

A summary of these taxes and all wages received appears on a W-2 Form, which an employer must give to an employee by January 31. The employer also files copies of this form with the IRS and with the state. Oh, and if you’re still wondering about FICA -- that stands for the Federal Insurance Contributions Act, the law that determines how much money must be paid toward Social Security and Medicare.

A W-2 Form contains a summary of all taxes and wages received. Employers are required to give each employee a W-2 Form by January 31.
A W-2 Form contains a summary of all taxes and wages received. Employers are required to give each employee a W-2 Form by January 31.

For more information on wages, taxes and related topics, check out the links on the next page.


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