Why does your take home pay decrease in January?

I currently run the global payroll for our 500+ employees and every January after the first pay run has gone out, my team and I get the same question. “Why did my paycheck go down and my taxes went up by so much? There must be a mistake!”

Without even looking into it I know what my first suspicion is, but it’s important to always do the due diligence and confirm my hypothesis.

So what is happening to your taxes and your take home pay every January?

In the US, we have mandatory taxes called Social Security Tax FUTA and Medicare tax. FICA? Social security tax is 6.2% and Medicare is 1.45% of your gross wages. There is an annual limit of TK for both of these taxes. If you are a high earner, it is likely that you will hit these annual limits early in the year. The more you earn, the sooner you will hit this annual limit.

Once you hit the limit, you no longer have to pay these taxes for the rest of the year. Leading to a bigger paycheck for the remainder of the year. The funny thing is, no one ever comes to me and asks “Hey, why did my paycheck go up? Did you make a mistake?” 🙂