If you’ve always wondered what makes up the difference between how much you’re paid and how much comes to your bank account, you’ll be reassured to know that it’s complicated. A variety of factors can impact what you take home. Where you live, your marital status and how much you save for retirement are all elements that can change your paycheck.
Take a look below to see what those deductions on your paycheck mean.
The amount of tax withheld from your paycheck is dependent on your salary and your allowances. When you start a new job, you’re required to fill out a W-4. This form is where you state how many allowances you’d like deducted. The more allowances you take, the fewer taxes will be withheld from your paycheck.
If you constantly receive a huge refund come April, it means you have too few allowances and need to adjust your W-4. If you always owe money to the IRS, you need to decrease how many allowances you’re taking out. According to the IRS website, if you don’t pay enough taxes throughout the year, you may incur a penalty.
If your status changes during the year, you might need to adjust your withholding. For example, that includes getting married, divorced, or getting a new job. You can change your W-4 at any time.
Depending on your state, you will have additional taxes taken out of your salary. There are nine states that do not have income tax.
Local taxes are dependent upon the county you live in. Only 13 states charge local income tax as well as state income tax.
If you have a traditional 401(k) or 403(b), the money will be taken out before taxes, so your taxable income will be smaller. If you have a ROTH 401(k) or 403(b), then your contribution will come from your post-tax salary. However, you won’t have to pay any taxes when you withdraw the funds in retirement.
You can set aside part of your income for contributions to your HSA or FSA account. That money will go towards paying qualified medical expenses. Like a retirement plan, the money you contribute to an HSA or FSA will not be taxed and will lower the total amount of taxes you’ll pay.
This goes to fund the Social Security program. When you’re receiving social security, your checks will be funded by other people’s paychecks.
Deductions from your paycheck for Medicare go toward funding the program. Like social security, when you’re eligible for Medicare, your account will be funded by current workers’ contributions.
If you receive health insurance through your workplace, your monthly premium will come out of your pay check tax-free.
Some jobs have union dues that automatically come out of your paycheck.
Most people are surprised to find that their bonuses are not taxed at the same rate as the rest of their income. Bonuses, not raises, are considered to be supplemental income by the IRS. It means that they are in addition to your normal salary.
By Aryea Aranoff