Your Guide to Payroll Deductions
That wonderful starting salary at your new job may be a lot lower than you expect once you factor in taxes and other payroll deductions. Here’s your guide to understanding what’s taken out of each check, and why your net salary may have you feeling gross.
(Your “gross” salary is the amount before payroll deductions and the “net amount” is your actual take-home pay. To get a true sense of the value of your salary after the following deductions, estimate your net pay using this paycheck analyzer.)
Federal Income Taxes
These taxes are paid to the federal government and are calculated as a percentage of your income. You decide just how much of your paycheck goes into Uncle Sam’s pocket when you fill out a W-4 form. Withhold a lot and you get less in each paycheck, but you may get a big refund on your tax return. Withhold too little and you’ll pay a big tax bill. Find out if you are withholding the right amount with this calculator.
State Income Taxes
These taxes are paid to the government in the state where you live. The amount of state income tax that you pay varies by state. Some states, such as Texas, do not withhold state income tax at all.
These are taxes paid to your local city. Local taxes may include an occupational tax, which you pay if you work in a city, even if you don’t reside there.
Social Security and Medicare
Who is FICA anyway? A law called the Federal Insurance Contributions Act (FICA) requires that you make contributions to Social Security and Medicare out of every paycheck. For 2014, the Social Security tax rate is 6.2 percent on income up to $117,000 and the Medicare tax rate is 1.45 percent of all income levels.
Each state has its own workers’ compensation laws and programs. Workers’ compensation, also known as workman’s comp, provides payments for medical and rehabilitation expenses due to on-the-job injuries and job-related illnesses. Workers’ compensation also provides disability payments if you are unable to work.
If you are participating in an employer’s health plan, you typically have to pay a part of the cost and your contribution is deducted each pay period. Look for lower-cost coverage through managed care plans such preferred provider organizations (PPOs) or health maintenance organizations (HMOs).
Health Savings Accounts
If you sign up for a health savings account through an employer, your contributions may be deducted straight from your paycheck. The money you place in a health savings account is tax-deductible and grows tax-free from year to year. Health savings accounts work in conjunction with high-deductible health insurance policies. Many employers chip in their own contributions to an employee’s health savings account.
When you sign up for a retirement savings plan, such as a 401(k) or 403(b) plan through an employer, your pre-tax contributions are deducted each pay period.
With a 401(k) plan, you choose the percentage of your salary that you’d like to contribute to a plan and you also get to choose how the 401(k) plan manager will invest your money. Many employers provide matching contributions up to a certain amount to employees’ 401(k) plans.
With 403(b) plans, which are offered by nonprofit organizations and some public-sector employers, employees also get to choose how much of their salaries and where among the plan’s options to invest.