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Summary
This article explains how US take-home pay is calculated — the rules, the formula, and the interesting zones where your marginal rate changes unexpectedly. For the actual rate tables (which change each January), see the year-specific articles:
How the US payroll tax system works
Unlike countries with a single national tax, the US stacks multiple independent taxes on top of each other:
- Federal income tax — paid to the IRS. Progressive brackets from 10% to 37%. Applied to taxable income (gross minus standard deduction and pre-tax deductions).
- Social Security (OASDI) — 6.2% of gross wages, up to an annual wage base cap. Stops collecting once you hit the cap.
- Medicare (HI) — 1.45% of all wages with no cap. An additional 0.9% applies above $200,000 (Single) or $250,000 (MFJ).
- State income tax — varies enormously. Nine states have no income tax at all. Fifteen states have a flat rate. The remaining states plus DC use progressive brackets.
- State disability insurance (SDI) — mandatory in California, New Jersey, New York, Hawaii, Rhode Island, and Washington. Small percentage of wages, sometimes capped.
- Pre-tax deductions — 401(k) contributions reduce federal and most state taxable income, but not FICA (Social Security + Medicare).
The formula
Where
The accounting identity
Every dollar of gross salary goes somewhere:
Gross = Net pay + Federal tax + Social Security + Medicare + State tax + SDI + 401(k)
This identity holds exactly. The calculator verifies it for every computation.
Why each tax exists
Federal income tax funds the federal government. It’s progressive — the marginal rate rises as income increases. The standard deduction gives everyone a tax-free band at the bottom.
Social Security funds the Old Age, Survivors, and Disability Insurance (OASDI) program. The wage base cap means high earners stop paying once they reach it.
Medicare funds the federal healthcare program for people 65+. No wage base cap — everyone pays 1.45% on all wages. High earners pay an extra 0.9% (Additional Medicare Tax, or AMT).
State income tax funds state governments. Nine states (AK, FL, NV, NH, SD, TN, TX, WA, WY) have no income tax, usually because they generate revenue from other sources (oil, tourism, sales tax).
SDI (state disability insurance) provides short-term wage replacement if you become unable to work due to non-work-related illness or injury.
401(k) is a voluntary pre-tax contribution to a retirement account. It reduces taxable income today in exchange for taxes deferred until retirement.
Key tax zones
The standard deduction free zone
The first $16,100 (Single, 2026) or $32,200 (MFJ, 2026) of income is effectively untaxed for federal purposes. This is equivalent to the UK’s personal allowance — a zero-rate band at the bottom.
The Social Security cliff
At the SS wage base (e.g., $184,500 for 2026), the 6.2% Social Security tax stops. This creates the most visible rate drop on the marginal rate chart — a 6.2 percentage-point decrease. Above this salary, each extra dollar of income is suddenly taxed 6.2pp less by Social Security, even though federal income tax continues to rise.
This creates a counterintuitive zone: earning more income around the SS cap can increase your keep-per-dollar, despite being in a higher income bracket.
The Additional Medicare Tax zone
Above $200,000 (Single) or $250,000 (MFJ), an additional 0.9% Medicare tax applies. This partially offsets the SS cliff drop — the marginal rate ticks back up slightly after dropping at the SS cap.
High-state combined rates
In California, the top state rate is 13.3% (12.3% + 1% Mental Health surtax on income over $1M). For a California resident in the 37% federal bracket, plus FICA, the combined marginal rate can exceed 50%.
New York City residents face additional local income tax on top of the 10.9% NY state top rate — one of the highest combined tax burdens in the US.
What changes each year
The IRS adjusts federal brackets and the standard deduction annually for inflation (announced in October/November via Rev. Proc.). The SSA announces the new Social Security wage base in October. The IRS announces the 401(k) limit in November.
State rates change less frequently but do change — some states have cut or reduced rates in recent years.
The calculator defaults to the current year. For historical comparisons, see the year-specific articles linked above.
Assumptions and limitations
- W-2 wage earners only — models payroll withholding. Self-employment income, investment income, and business income are not modelled.
- Standard deduction assumed — users can enter an itemized deduction if theirs exceeds the standard amount.
- State brackets are simplified — some states have complex local taxes (NYC, MD counties, IN counties) not modelled.
- No dependents, credits, or exemptions — the Child Tax Credit, Earned Income Credit, and similar are not modelled.
- SDI modelled for 6 states only — CA, NJ, NY, HI, RI, WA. Other state-specific payroll taxes (OR transit, SF payroll) are excluded.
- Filing status: Single and MFJ only — Head of Household is not modelled.