Tax & Payroll Glossary

Clear, jargon-free definitions of 35 essential US tax, payroll, and personal finance terms. Use this reference alongside our paycheck calculator.

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4
401(k)
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars (traditional) or after-tax dollars (Roth) from their paycheck. For 2026, the employee contribution limit is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and older. Employer matching contributions do not count toward the employee limit.
A
Additional Medicare Tax
A 0.9% surtax on earned income above $200,000 for single filers ($250,000 for married filing jointly). Unlike the regular Medicare tax (1.45%), this additional tax is only paid by the employee; the employer does not match it. It was enacted as part of the Affordable Care Act.
Adjusted Gross Income (AGI)
Your total gross income minus specific deductions (called "above-the-line" deductions) such as student loan interest, IRA contributions, and self-employment tax. AGI is the starting point for calculating your taxable income on your federal return and is used to determine eligibility for many tax credits and deductions.
C
Capital Gains Tax
A tax on the profit from selling an asset (stocks, real estate, crypto) held for investment. Short-term capital gains (assets held less than one year) are taxed as ordinary income. Long-term capital gains (assets held more than one year) are taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income.
Cost of Living Adjustment (COLA)
An annual increase to Social Security benefits and certain tax parameters (brackets, standard deduction, wage base) designed to keep pace with inflation. The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
D
Deduction (Tax Deduction)
An amount subtracted from your gross income to reduce your taxable income. The standard deduction for single filers in 2026 is $15,700. Alternatively, taxpayers can itemize deductions if their qualifying expenses (mortgage interest, state/local taxes, charitable contributions) exceed the standard deduction amount.
E
Earned Income Tax Credit (EITC)
A refundable federal tax credit for low-to-moderate income working individuals and families. The amount depends on income, filing status, and number of qualifying children. For 2026, the maximum EITC for a family with three or more children is approximately $7,830.
Effective Tax Rate
The actual percentage of your total income that you pay in taxes, calculated by dividing your total tax liability by your total income. It is always lower than your marginal tax rate because of progressive brackets. For example, a single filer earning $80,000 might have a marginal rate of 22% but an effective rate of about 14%.
Employer Matching
A contribution your employer makes to your retirement account (typically a 401(k) or 403(b)) based on your own contributions. A common match is 50% of the first 6% of salary contributed. Employer matches are essentially free money and should be maximized before considering other retirement accounts.
F
Federal Income Tax
A progressive tax levied by the Internal Revenue Service on earned and unearned income. The US has seven tax brackets ranging from 10% to 37%. Federal income tax is the largest deduction on most paychecks and is calculated based on your filing status, number of allowances (W-4), and pre-tax deductions.
Federal Insurance Contributions Act (FICA)
The law that mandates payroll taxes funding Social Security (6.2% of wages up to the wage base) and Medicare (1.45% of all wages). Both employee and employer pay equal shares, totaling 15.3%. Self-employed individuals pay the full 15.3% as self-employment tax.
Filing Status
Your tax classification based on marital and family status, which determines your tax brackets, standard deduction, and eligibility for certain credits. The five statuses are: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.
Flexible Spending Account (FSA)
An employer-sponsored account that lets you set aside pre-tax dollars for eligible healthcare or dependent care expenses. For 2026, the healthcare FSA limit is $3,300. Unlike an HSA, FSA funds generally must be used within the plan year (with some rollover or grace period provisions).
G
Gross Pay
Your total earnings before any deductions, including federal and state taxes, FICA, retirement contributions, and insurance premiums. Gross pay is your salary or hourly rate multiplied by hours worked (including overtime), plus any bonuses, commissions, or other compensation.
H
Head of Household
A filing status for unmarried taxpayers who pay more than half the cost of maintaining a home for a qualifying dependent. Head of Household filers receive wider tax brackets and a larger standard deduction ($22,500 in 2026) than Single filers, resulting in lower taxes.
Health Savings Account (HSA)
A tax-advantaged account available to individuals enrolled in a High Deductible Health Plan (HDHP). Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. For 2026, contribution limits are $4,300 (individual) and $8,550 (family). HSAs are the only triple-tax-advantaged account.
M
Marginal Tax Rate
The tax rate applied to your last (highest) dollar of taxable income. In a progressive system, each additional dollar of income above a bracket threshold is taxed at the next higher rate. Your marginal rate is always higher than your effective rate. Knowing your marginal rate is critical for evaluating the after-tax value of raises, bonuses, and deductions.
Medicare Tax
A payroll tax of 1.45% on all wages (no income cap), with an Additional Medicare Tax of 0.9% on earnings above $200,000 (single). Employers match the base 1.45% but not the additional 0.9%. Medicare tax funds the federal health insurance program for Americans aged 65 and older.
N
Net Pay (Take-Home Pay)
The amount deposited into your bank account after all deductions are subtracted from gross pay. Net pay equals gross pay minus federal income tax, state income tax (if applicable), FICA taxes, and any voluntary deductions (retirement contributions, insurance premiums, etc.).
P
Payroll Tax
Taxes deducted from employee wages and/or paid by employers to fund government programs. The two main federal payroll taxes are Social Security (6.2% each for employee and employer) and Medicare (1.45% each). Some states also impose payroll taxes for disability insurance, unemployment, or paid family leave.
Progressive Tax System
A tax structure where higher income is taxed at higher rates through brackets. The US federal income tax is progressive: the first $11,925 of taxable income is taxed at 10%, the next portion at 12%, and so on up to 37%. This means higher earners pay a larger share of their income in taxes.
R
Roth IRA
An individual retirement account funded with after-tax dollars. Contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free. For 2026, the contribution limit is $7,000 ($8,000 for those 50+). Income limits apply: single filers earning above $161,000 (MAGI) face reduced or eliminated contributions.
S
Self-Employment Tax
The combined Social Security (12.4%) and Medicare (2.9%) tax paid by self-employed individuals, totaling 15.3% on net self-employment earnings. Unlike employees who split FICA with their employer, self-employed workers pay both halves. Half of self-employment tax is deductible as an above-the-line deduction on your tax return.
Social Security Tax
A payroll tax of 6.2% on wages up to the annual wage base ($176,100 for 2026). Employers pay a matching 6.2%. Self-employed individuals pay both halves (12.4%) as part of self-employment tax. Once your earnings exceed the wage base, no additional Social Security tax is withheld for that year.
Social Security Wage Base
The maximum amount of earnings subject to Social Security tax in a given year. For 2026, the wage base is $176,100. Earnings above this amount are not subject to the 6.2% Social Security tax, though they remain subject to the 1.45% Medicare tax (and potentially the 0.9% Additional Medicare Tax).
Standard Deduction
A flat dollar amount that reduces your taxable income, available to all taxpayers who do not itemize. For 2026: $15,700 (Single), $31,400 (Married Filing Jointly), $15,700 (Married Filing Separately), and $22,500 (Head of Household). Additional amounts apply for taxpayers who are blind or aged 65 and older.
State Income Tax
Income tax levied by individual states on wages and other income. Forty-three states and DC impose income taxes, while nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) have no income tax on wages. State tax rates range from flat rates (e.g., Illinois at 4.95%) to highly progressive systems (e.g., California at 1%-13.3%).
T
Tax Bracket
A range of income taxed at a specific rate within a progressive tax system. The US has seven federal brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Only the income within each range is taxed at that rate, not your entire income. Brackets adjust annually for inflation.
Tax Credit
A dollar-for-dollar reduction of your tax liability, as opposed to a deduction which only reduces taxable income. Credits are more valuable than deductions: a $1,000 credit saves $1,000 in tax, while a $1,000 deduction saves only $220 (at the 22% bracket). Credits can be refundable (paid even if they exceed your tax) or nonrefundable.
Tax Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the government on your behalf. Withholding is based on your W-4 form selections (filing status, dependents, additional withholding). Proper withholding avoids large tax bills or excessive refunds at filing time.
Traditional IRA
An individual retirement account where contributions may be tax-deductible (depending on income and employer plan coverage). Earnings grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. For 2026, the contribution limit is $7,000 ($8,000 if age 50+). Required minimum distributions begin at age 73.
W
W-2 Form
An annual form employers are required to provide to employees by January 31. It reports total wages, federal and state taxes withheld, Social Security and Medicare wages and taxes, retirement plan contributions, and other compensation details. You use Form W-2 to file your federal and state income tax returns.
W-4 Form
The Employee's Withholding Certificate you submit to your employer to determine how much federal income tax to withhold from your paycheck. The current W-4 (revised in 2020) uses a five-step process based on filing status, multiple jobs, dependents, and other adjustments. You can update your W-4 at any time.
Wage Base Limit
The maximum amount of earnings subject to a particular tax. The most common wage base limit is for Social Security tax ($176,100 in 2026). Once your year-to-date earnings exceed this amount, Social Security tax (6.2%) is no longer withheld, effectively increasing your take-home pay for the remainder of the year.
Withholding Allowance
A value previously used on the pre-2020 W-4 form to adjust the amount of federal tax withheld. Each allowance reduced the amount withheld. The current W-4 eliminated allowances in favor of a more straightforward system based on deductions, credits, and additional income.

Related Resources

2026 Tax Brackets

All federal brackets for every filing status

How Paychecks Work

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W-4 Form Explained

How to fill out your withholding form