Photo by The New York Public Library on Unsplash
New Workers receive Paycheck every Month, Bi-Weekly for some and Weekly for few of the folks. First thing they notice after getting their paycheck stub is where the rest of the Money?, Welcome to the real-world of paycheck deductions and withholdings.
Have you noticed the list of items that your employer is deducting every month from your paycheck? When you ask your HR or friends they may say it is just taxes to the government…Well they are correct. Let’s see what it is and see a few Smart ways you can increase your take home salary.
Payroll in Stone Ages
Have you noticed in the Flintstones movies where Fred Flintstones get paid, well that is literally true. Employers from the stone age paid their employees with Beer, Bread, Grain, Meat, Salt and Rice which were necessary at that time. History states us ancient civilization used Cuneiform a form of Clay based tablet to record rations paid.
Enough of history lessons, Let’s get to the details of your Paycheck
List of Mandatory Paycheck Deductions
- Federal Income Tax
- State Income Tax
- Social Security & Medicare Taxes – also known as FICA taxes
- Local tax to Cities and County
- Your 401(k) withholding should be Mandatory as well, Read this Blog for more details. Not Enrolled in your 401(k)? Do it Now!
Federal Income Tax – IRS
Federal Tax is the tax you pay the Federal government (IRS) on your annual earnings, they are applied to all forms of earnings that make up a taxpayer’s taxable income such as employment earnings like salary, tips, bonuses. There are capital gains when you make money by selling your house, stocks, winning lottery tickets or your high rolling casino winnings. IRS have various Income Brackets based tax rates that will be deducted.
State Income Tax
You don’t have to pay State Income Tax for your Earned salary if you are living in Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire and Tennessee don’t tax earned wages. Just don’t decide to move to one of these states yet, There are pros and cons on not paying State Income Tax,
I will try to discuss this at a later blog, now let’s discuss about others
Social Security and Medicare Taxes – FICA Tax
These two taxes are a bit special, Social security taxes we pay is to fund the United States government’s Social Security trusts. In a way these taxes indirectly fund the current retirees, surviving spouses and Disabled workers.
Medicare taxes fund the federal program that helps with the health care costs for older and disadvantaged Americans. This tax is a booster to the Medicare program which also gets their money through collecting premiums.
FICA also have AMT (Additional Medicare Tax) which are additional medicare tax collected from high-income earners to fund the Affordable Care Act (ACA)
This tax in a way is designed to make existing employed earners pay for retirement benefit to retirees, survivors and disabled americans. If you want to qualify to get Social Security Benefits you must have contributed to social security for 10 years minimum.
Local tax to Cities and County
In addition to State Income Taxes, the following states Alabama, California, Colorado, Delaware, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York (High) , Ohio, Oregon, Pennsylvania, West Virginia allow their municipalities & counties to charge you additional deductions on your paycheck.
Maybe you move to one of the states mentioned above with no income tax to save some more money, it is worth considering…
Bonus Tip: Unleash the Power of W-4 in Paycheck Deductions
Employee’s withholding certificate is an IRS W-4 form that allows you to tell your employer how much tax to withhold from your paycheck to reduce or increase your deductions. Use the IRS Tax Withholding Estimator and adjust your paycheck deductions and take home more salary than before.