Where does all your money go? Your paycheck explained
The number of tax exemptions you claim on your W-4 form determines how much federal tax the government will take out of each paycheck and may effect whether you overpay taxes and get a refund. USA TODAY
Take a good look at your paycheck to see where your money is going.(Photo: iStockphoto)
Payday! Getting your paycheck is exciting, but it can also be a bit disappointing once you realize how much money you’re actually taking home. Why aren’t you making as much as you expected? Your paycheck stub has all the answers.
Though not all paychecks are alike, there are elements that all employers must include. Let’s break it down:
Gross Pay vs. Net Pay
Let’s say you are making $35,000 a year and you are paid every two weeks — that means you should be taking home $1,346.15 each pay period. But unfortunately, this isn’t the case. $1,346.15 is your gross pay, or the total amount you’ve earned before everything is taken out of your check. Then you are left with your net pay, which is the total amount of money you get to take home.
What accounts for the difference between your gross pay and net pay? A ton of deductions and withholdings.
Federal Income Taxes
When you were first hired, you filled out a W-4 form and claimed the number of tax exemptions you have. This amount tells the federal government how much money to take out of each paycheck to cover your taxes. The more allowances you take the less federal income tax the government will take out of your paycheck.
When it comes time to filing your taxes at the end of each year, the amount already taken out will go towards the total you owe. If too much money is withheld from your paycheck, you receive a refund after you file your tax return. If you haven’t paid enough, you could end up owing at the end of the year.
State Income Taxes
Many states require a state tax, and the rate varies by state. According to Bankrate[1], there is no state income tax in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And Tennessee and New Hampshire only tax dividends and income from investments.
Same as federal taxes, your state income tax will get deducted from your paycheck to cover taxes you may owe at the end of the year.
Social Security & Medicare
The federal government also deducts money as your contribution to its Social Security and Medicare programs. You’ll be required to give a percentage of your income, currently 6.2% for Social Security and 1.45% for Medicare, to help fund these programs. Your employer must also chip in 6.2% for Social Security and 1.45% for Medicare.
The Social Security and Medicare programs are in place to help with your income and insurance needs once you reach retirement age.
Insurance & Retirement
If you’re on your employer’s insurance plan, this deduction may come out of your paycheck to cover your medical, dental and life insurance premiums.
If you sign up for a retirement savings plan, you select a percentage of your salary that you’d like taken out of each pay check to go into a 401(k) or other retirement savings option. If you’re lucky, many employers will match your percentage as an added benefit.
Now you know where all that hard-earned money is going. Take a look each pay period and make sure there are no errors.
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