How Paycheck Tax Is Calculated, Step by Step

Every pay stub tells the same story in three lines: what you earned at the top, what landed in your bank account at the bottom, and a block of taxes in the middle. This guide explains how that middle block is actually calculated, in the same order a payroll system works through it: annualise your pay, subtract the standard deduction, run the result through the federal tax brackets, add FICA payroll taxes, then add state tax, and finally divide everything back into each paycheck. Understanding the sequence makes any paycheck — and any calculator estimate — much easier to check.

Step 1: Start with gross pay, then annualise it

Federal and state income taxes are annual taxes, but you are paid weekly, every two weeks, or monthly. Payroll bridges that gap by annualising each paycheck: it treats the current pay period as if it were typical of the whole year. A weekly gross of $1,000 is annualised as $1,000 × 52 = $52,000. A salary is already annual, so it is used as-is. Everything you are paid counts toward the gross figure for withholding purposes — regular wages, overtime, bonuses, and commissions alike.

This annualising step explains a quirk many workers notice: a paycheck with a lot of overtime in it has noticeably heavier tax withheld. Payroll is not punishing the overtime; it is assuming, in effect, that every paycheck this year will look like this one, and withholding accordingly. The difference is sorted out when you file your annual return.

Step 2: Subtract the standard deduction

Federal income tax is not charged on every dollar you earn. The first slice is sheltered by the standard deduction — for 2026, that is $16,100 for a single filer. Using the example above: $52,000 of annualised gross pay minus the $16,100 standard deduction leaves $35,900 of taxable income. Only this reduced figure goes into the tax brackets.

Your Form W-4 can change this step. If you tell your employer about other income, extra deductions, or multiple jobs on the W-4, payroll adjusts the taxable wage figure it uses for withholding. The standard deduction itself is explained in detail in our guide to the 2026 standard deduction.

Step 3: Apply the federal brackets in slices

Taxable income is taxed in slices, each at its own rate — this is the marginal bracket system. On $35,900 of taxable income for a single filer in 2026:

First $12,400 at 10% = $1,240
Remaining $35,900 − $12,400 = $23,500 at 12% = $2,820
Annual federal income tax: $1,240 + $2,820 = $4,060

Note what did not happen: earning enough to reach the 12% bracket does not move your earlier dollars out of the 10% bracket. The full rate tables and a bigger worked example are in our guide to the 2026 federal income tax brackets.

Step 4: Add FICA payroll taxes

Separate from income tax, almost every paycheck carries FICA taxes — Social Security at 6.2% of wages (up to the annual wage base of $184,500 for 2026) and Medicare at 1.45% of all wages. FICA is worked out on your gross wages with no standard deduction, so it is calculated from the full $52,000 in our example: Social Security is $52,000 × 6.2% = $3,224, and Medicare is $52,000 × 1.45% = $754, for a combined $3,978 per year. Our FICA taxes explained guide covers the wage base, the employer matching share, and the additional Medicare tax in full.

Step 5: Add state (and sometimes local) tax

Most states with an income tax run a smaller version of the same process: their own standard deduction or exemption, their own brackets — or in some states a single flat rate — applied to your wages. A few states levy no tax on wage income at all. Some cities and counties add a local income tax on top. Because every state's rules differ, state withholding is the part of a paycheck that changes most when you move or start working in a new state, even on exactly the same salary.

Step 6: Split the annual totals back into each paycheck

Finally, payroll divides the annual figures by the number of pay periods. For the weekly-paid example, ignoring state tax for a moment:

Federal income tax: $4,060 ÷ 52 ≈ $78.08 per paycheck
FICA: $3,978 ÷ 52 = $76.50 per paycheck
Total withheld ≈ $154.58, leaving net pay of roughly $845.42 from the $1,000 gross, before any state tax or voluntary deductions

This is why paycheck calculators ask for your pay frequency: the same annual tax looks very different spread over 52 weekly checks than over 24 semi-monthly ones.

Withholding is an estimate, not the final tax

The amounts above are withholding — prepayments collected during the year. Your actual tax is calculated once, on your annual tax return, after all your income, deductions, and credits are known. If too much was withheld you receive a refund; if too little, you pay the balance. Employers work out withholding using the method in IRS Publication 15-T, driven by the information on your Form W-4: whether you have multiple jobs or a working spouse, dependents, other income, deductions beyond the standard one, and any extra amount per paycheck you ask to have withheld.

Payroll knows only what the W-4 tells it. A second job, freelance income, or a spouse's earnings are invisible to your employer's system unless you put them on the form — which is why a W-4 that was accurate for a single job can under-withhold badly once your situation changes.

Why real paychecks differ from estimates

W-4 settings. Multiple jobs, dependents, or extra adjustments on the form all change withholding, sometimes a lot.
Pre-tax deductions. Health insurance premiums and traditional 401(k) contributions reduce the wages income tax is calculated on (401(k) contributions do not reduce FICA), so two identical salaries can withhold differently.
Irregular pay. Bonuses, commission spikes, and overtime-heavy periods are annualised as if they were typical, which overstates tax for that one check.
State and local differences. Moving between states, or working in a city with its own income tax, changes the calculation even when nothing else does.
Credits and year-end items. Most tax credits are settled on the return, not in payroll, so they never appear in a paycheck estimate.

Key takeaways

Payroll annualises each paycheck, subtracts the standard deduction, applies the federal brackets in slices, adds FICA and state tax, then divides the total by the number of pay periods.
FICA is calculated on gross wages with no standard deduction, which makes it a bigger slice of most paychecks than people expect.
Withholding is only a running estimate controlled by your Form W-4 and IRS Publication 15-T; your real tax is settled on your annual return.
Estimates differ from real stubs mainly because of W-4 settings, pre-tax deductions, irregular pay, and state or local taxes.

Run your own numbers through our Paycheck Calculator to see each step applied to your pay, and read FICA taxes explained for a closer look at the Social Security and Medicare lines on your stub.

Keep exploring

Put the numbers to work: Paycheck Calculator · No Tax on Overtime Calculator · No Tax on Tips Calculator

Last updated: 2026-10-31. Tax parameters: 2026 (IRS Rev. Proc. 2025-32; SSA wage base; Tax Foundation state tables).

Estimate only — not tax advice. NetPayLabs provides general educational estimates using 2026 federal and state tax parameters, the standard deduction, and simplified state rules. Your actual withholding and tax depend on your W-4, pre-tax deductions (401(k), health premiums), credits, local taxes and your full return. Consult a qualified tax professional for advice about your situation.