Your Paycheck Deductions Explained

(Deduct This!)

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 cheated.

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

Federal taxes 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 get a bigger refund once you’ve submitted your tax return in the spring. Withhold too little and you’ll get less of a refund, and possibly have to pay a big tax bill. Find out if you are withholding the right amount with this calculator.

STATE AND LOCAL TAXES

Some states don’t withhold state income tax at all. You’ll have to do a little research on your own state to see how much is taken out, and how this money is spent.

Local taxes are paid to the county or municipality where you live. These taxes also 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. The Social Security tax rate for employees is currently is 6.2 percent on income up to $117,000 and the Medicare tax rate is 1.45 percent of all income levels.

WORKERS’ COMPENSATION

Each state has its own workers’ compensation laws and programs. “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.

Young adult thinks about his payroll deductions.

HEALTH INSURANCE

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 (HSA)

If you sign up for a health savings account at your job, your contributions may be deducted straight from your paycheck. The money you place in an HSA is tax-deductible and grows tax-free from year to year. Health savings accounts can offset the cost of high-deductible health insurance policies. Many employers chip in their own contributions to your health savings account. Read the fine print to find out if your HSA balance carries over from year to year.

girl being goofy while wondering about her paycheck deductions

RETIREMENT

When you sign up for a retirement savings plan, such as a 401(k) or 403(b) plan through an employer, your pretax 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. 403(b) plans, which are offered by nonprofit organizations and some public sector employers, also let you choose how much of your salary is deducted and where it’s invested.

We know, it can be shocking to see how much money is deducted from your paycheck each month. However, by knowing how and why that money is deducted, you can make more informed decisions about your paycheck.

As always, we’ve got your back. — The On Your Own Team End of article insignia



[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]