When you applied for your job, you agreed to make a certain amount, but that’s probably not the same amount you see on your paycheck. So, where does it all go? There is a lot of behind the scenes work that happens before you get your check. There are certain deductions and taxes that have to be withheld. Thank goodness someone knows what they’re doing, right? Next time you see your payroll specialist, thank them.
Where is my paycheck going?
Everyone who receives a paycheck notices a big difference between amount earned and amount received. To help you better understand where all your money is going I’ve compiled a list, with a little help from a payroll pro, of everything that is withheld from your paycheck.
1. Withholding allowances – You got the job! Congratulations! Now you have a bunch of paper work to fill out, and one is Form W-4, the Employee’s Withholding Allowances Certificate. This particular form determines how much money will be withheld in federal income tax from your paycheck. What are withholding allowances? Basically, you need to know that the more you claim the less that is withheld in federal income tax each pay period. Hence why this form is so important.
You may wish to take an allowance for a number of reasons. Maybe you are single and only have one job – one income – or maybe you are married and you have one job and your spouse doesn’t work and you need the extra money each paycheck. However, it is possible to claim zero allowances. In this case, you have the maximum amount withheld; however, you have an opportunity to redeem more back on your year-end tax returns.
2. State Income Taxes – Forty-one out of 50 states require these taxes to be withheld from an employee’s paycheck. Those states for which this tax does not apply are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
3. FICA – To quote the popular nineties TV series, Friends, “Who’s this guy FICA and why does he keep taking all my money?” Maybe many of you feel this way and you’re not alone. All deductions and taxes withheld from your income are visible on your paycheck but often times they are abbreviated, making it hard to understand what they mean. Under FICA or the Federal Insurance Contribution Act, 12.4% of earned income up to an annual limit ($113,700 as of 2013) must be paid into Social Security and 2.9% must be paid into Medicare. Good news, if you’re a wage or salaried employee, you only pay half of this tax and your employer picks up the rest.
4. Benefits – There may be other deductions that come out of your pay. For instance, maybe you selected to add benefits when you joined your new employer. Now a portion of your check is taken out to pay for medical and dental insurance. Maybe you are putting money aside into a Flexible Spending Account or hopefully your employer gives you the opportunity to make contributions to a 401(k) plan.
A 401(k) plan is a feature allowing employees to contribute a portion of their earnings to individual profit-sharing accounts. There are two ways one might elect to participate; either through a traditional 401(k) plan or a Roth 401(k) plan. With a traditional 401(k) your contributions are made pretax, meaning you can subtract them from your taxable income and lower your taxes for the year the contribution was made. You are not free from having to pay taxes, however. You will have to pay income taxes on the overall contribution when you withdraw the money from your account. With a Roth 401(k), your contributions are made post tax, meaning you pay income taxes upfront and your contribution grows tax free. There is no right or wrong choice, it is entirely up to you what you choose, but taxes are a key difference and certainly something to consider.
Getting paid is important to all of us and in the end there are multiple reasons why what you make may be different from what you actually take home. Therefore, it is important to understand how and when we’re paid. Hopefully this blog gave you more insight into where some of your money goes. Now, where the rest of it goes, well, that’s up to you.