Final answer:
The percentage of your paycheck withheld for taxes varies based on your W-4 form, local and state tax rates, your income, and how that income fits into the federal tax brackets. There is a difference between the average tax rate and the marginal tax rate, with the latter being the tax rate on the last dollar earned. Understanding your average tax rate helps with budgeting and financial planning.
Step-by-step explanation:
The percentage of your paycheck that is withheld for taxes depends on various factors, including the information you provide on your W-4 form, your earnings, and the state and local tax rates. When starting a job, the W-4 form helps determine how much money is withheld from each paycheck. While it might be tempting to adjust withholdings to increase your take-home pay, it's crucial to remember that these withholdings cover your state, federal, and sometimes local taxes. At the end of the tax year, any discrepancies between what was withheld and what you actually owe will be settled during tax filing.
Each state has its own approach to taxation; some states have progressive tax rates, while others have a flat tax or no income tax at all. It's important to understand that while federal income taxes are the same throughout the United States, state and local taxes can vary significantly. Your actual take-home pay will depend on your gross pay, the tax bracket you're in, deductions, and the sum of federal, state, and possible local taxes that are withheld.
For example, if your bi-weekly paycheck is $1,500, taxes deducted by various governments might leave you with a net pay of $1,000. Knowing the percentage of taxes withheld from your paycheck is useful for financial planning and understanding your average tax rate, which is the percentage of your income that goes to taxes overall. Planning for savings and retirement also factors into how much of your income you should be setting aside, post-taxes.