If you are one of the millions of working people in the United States, you’ve probably noticed a few things about your paycheck, the most disappointing of which is the money that come out. For some lucky workers in certain states, only Federal taxes are taken out. But for other workers, they are taxed on the state and local level, in addition to Federal taxes. What are all of these different taxes, and where do they come from? We’ll answer that below.
Federal Income Tax
This amount is determined by the information you filled out on your Form W-4. This form is mandatory for your employer to have in order for you to pay federal taxes. If you do not fill out a W-4, your taxes will be withheld at the highest rate (single/zero). If you need help filling out your Form W-4, try using this calculator.
State Income Tax
There are two types of State Income Tax that states impose on their residents: flat tax rates and graduated tax rates.
- Flat Tax Rate: This means that wages are taxed at a flat percentage rate, regardless of the amount of income you bring in. For example, a person making $1,000,000 in Indiana, a state with a 3.3% flat tax rate, would withhold $33,000 for state taxes. A person making $100,000 would withhold $3,300 for state taxes, also 3.3% of their income. Only 7 states have a flat tax rate: Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah.
- Graduated Tax Rate: This means that wages are taxes based on brackets. Brackets are based on your level of income, and you move brackets as your income increases or decreases. Someone making $1,000,000 is in a different tax bracket than someone making $100,000, and both people are taxed according to their brackets. The District of Columbia and 36 states are taxed using a graduated tax rate.
There is one last option for State Income tax – none! Because states can choose how and if to deduct state income tax, some states do not take it out. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Local Income Tax
Local income tax is levied by a local authority, for example a county or municipality. Only a few states impose local tax rates, and only in certain areas, as it is up to the country or jurisdiction to decide whether or not they want to impose local taxes. The following states have areas that levy local taxes: Alabama, Colorado, Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, West Virginia. No one expects you to know what all the local, state, and federal rates that apply to you are. That’s why we have PaycheckCity calculators! Use these calculators to determine what your take-home pay would be if you lived in a different state or city! If you’re thinking of moving, but want to take a look at the best and worst states for your paycheck, take a look at the Best Paycheck Cities in America Infographic.
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These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.