Understanding Payroll Deductions
When was the last time you took a good look at your paycheck stub? It’s probably been a while, especially if you have direct deposit. Many companies now manage all payroll tasks electronically, which means you never see a hard check or any piece of paper with your information. And even if you do still receive a paper check stub every two weeks, you might not realize what all those deductions mean. Here’s a rundown of the most common payroll deductions:
Federal Income Taxes
Federal taxes are calculated as a percentage of your income. When you start a new job, you fill out a W4 form to indicate the percentage to withhold. If the amount is too high, you will get a tax refund after you file your yearly taxes. If you don’t have enough withheld, you will be responsible for paying the remainder of your share. Ideally, you should have an amount withheld that is as close as possible to the amount you owe.
State Income Taxes
State taxes work like federal taxes, but are paid to the government of the state in which you live. Several states, including Florida, Nevada and Texas, do not collect state income tax. Again, you determine the percentage you want withheld from each check.
Local taxes are paid to the city in which you work, even if you don’t live in that city.
Social Security and Medicare
If you’ve always wondered what FICA means, it stands for a law called the Federal Insurance Contributions Act, which requires employees to contribute to Social Security and Medicare with every paycheck.
Health, Dental and Other Insurance
Most employer benefit plans require you to pay a portion of the plan premium. If you are participating in your company’s benefits plan, your contribution will be deducted each pay period. If you are not sure how much is being withheld or what your benefits package includes, talk to the benefits coordinator on your company’s HR team.
Health Savings Accounts
Many employers offer health savings accounts as a way to offset the costs of high-deductible health insurance. If you participate in a health savings account, the amount you choose to contribute will be deducted from each paycheck and deposited into the savings account.
If you participate in your company’s 401(k) or 403(b) retirement plan, the percentage of your pre-tax pay you choose to have withheld will be taken out of every paycheck and placed in the retirement account. These plans have a number of rules surrounding when and how you can access the money in them, so be sure you understand them before you choose to withdraw or transfer any funds. Use our retirement savings calculator to see if you’re saving enough to retire when you’d like to.
Now that you better understand common payroll deductions, make the most of your take-home pay by establishing a budget. Our household expenses calculator is a great tool to help you put together a realistic budget. Or if you need additional assistance, our online financial assessment will walk you through the steps.