General > Taxes Where Did It All Go? Breaking Down Your Paycheck

Team PV

“I work really hard for my not-nearly-high-enough salary. Where the eff does it all go?”

Well, if you looked at your pay stubs recently, you’d know! We kid. We’ll cut you some slack here, because those payroll deductions (or anything having to do with the IRS) are rarely clear-cut.  

Log into your HR portal – or review your actual paper stub if you don’t use direct deposit – and let’s break down all those taxes:

Federal Income Tax: Your tax bracket and your allowances – that is, what you plugged into your W-4 form with your employer – determine how much Uncle Sam snatches from your paycheck. While your income dictates your particular tax bracket, the allowances on your W-4 tell your employer how much, or how little, you’d like to withhold from the IRS. If you withhold a higher amount, you’ll have more in your paycheck … but you may pay a little more to Uncle Sam in April.

State Income Tax: Depending on which state you live in, state taxes are also automatically withheld from each paycheck. Forty-three states collect income tax, but what you’ll pay varies: some have graduated-rate income taxes (like your federal taxes, if you make more, you pay more), some have several tax brackets, and some have one single rate for all residents. Fun fact: Only two states – New Hampshire and Tennessee – tax only dividend and investment income. Check how much your state jacks from your paycheck.

FICA Taxes: Short for the Federal Insurance Contributions Act (and not to be confused with FICO, which is related to your credit score) these taxes are automatically withheld from each paycheck and are separate from your federal and state income taxes. Social Security takes 6.2% from your paycheck and Medicare snags 1.45%. Uncle Sam also requires your employer to pay up and match your deductions. If you’re self-employed, you’ll instead pay that 15.3% total as SECA – or Self Employed Contributions Act – Tax.

There are base wage limits for the Social Security portion of your taxes, meaning you won’t pay taxes on any earnings beyond $118,500 for 2015. (Fair? Maybe not, but that’s an entirely different issue.) You’ll continue to shell out Medicare taxes no matter what you earn. There is some consolation in terms of FICA taxes: severance pay, workers compensation payments, and employer contributions to a 401(k) or similar retirement plan are all exempt from FICA taxes.

Retirement Savings/Insurance/Flexible Spending Accounts (FSAs): (links) These particular deductions are ones that you choose to have withheld from your paycheck. If you have a 401(k) with your employer, you set the amount that’s taken from your paycheck and stashed in your retirement savings; the same goes for any cash you’ve allotted to your FSA. If you’re dropping f-bombs and deliberating whether or not to slash your retirement contributions, think of these deductions as a benefit: they’re taken from your pre-tax wages, which reduces your overall taxable income.

Stop. Deep breath. These payroll deductions are all pretty standard. Don't forget to update your W-4 when you get married or have a baby, because those changes will affect how much income tax you can deduct from your paycheck.  

 

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