The largest amount of taxes withheld from your paycheck will be your, federal income tax.
Each year, you owe the federal government a certain amount based on your gross income. The government has found a way to make paying these taxes a little less painful – it withholds them, along with other required deductions, from your paycheck each pay period.
These withheld dollars act as a prepayment to your tax bill owed to the government. When you complete your income tax return at the end of the year, the IRS determines whether you’ve “prepaid” too much, or not enough (if you’ve overpaid, you will get a refund).
When you start a new job, you get to decide how much money is withheld from your pay check by completing a W-4 form. The W-4 form asks you to indicate the number of personal allowances you wish to take. These allowances reduce the amount of income that the government views as taxable.
If you take no allowances, more money will be withheld to pay taxes from your check. If you take a larger number of allowances, less taxes will be withheld.
After you receive your paycheck and notice the amount of money deducted from your gross income, you may be asking “Where did my dough go?” You understand that the amount of your paycheck indicates your net income and not your gross income. But, you want to know exactly where the money that made up your gross income went. It didn’t disappear. It is not M.I.A. So, where did that money go? No worries – this information is outlined in detail on the paycheck stub.
Money is deducted from your gross income for payroll with-holdings. There are two types of payroll with-holdings: mandatory taxes and optional deductions.
Mandatory taxes – withheld from your paycheck:
Federal Withholding Tax – To pay federal income taxes. The amount withheld depends on two factors: the amount of money you earn and the information you provide on your W-4 Form. (You can change this amount. Learn more – What is the W-4 Program)
State Withholding Tax – To pay state income tax and help pay for government needs within the state you reside. The amount of money deducted depends on the amount of money you earn. Some states don’t have state income tax. (you may or may not change based on the state)
FICA – Federal Insurance Contribution Act (you can not change these amounts)
Social Security Tax – This tax helps fund Social Security which provides retirement income for the elderly and pays disability benefits. 6.2% of everyone’s paycheck is deducted for this tax.
Medicare Tax – Medicare is the nation’s health care program for the elderly and disabled. 1.45% of everyone’s paycheck is withheld for this tax.
OPTIONAL DEDUCTIONS: When you elect to have additional with-holdings deducted from your paycheck.
- Medical – If your employer offers medical benefits (such as health insurance), you may elect to take advantage of this benefit. In that case, an amount will be deducted from your paycheck to pay for your portion of the medical benefit.
- Retirement Plans– If your employer offers an employer-sponsored retirement plan, you can determine the amount of money you would like stash away for your retirement. Many employers have a match program; they will match a certain percentage of what you are saving for retirement. This is free money for your retirement and it is highly recommended that you take advantage of this benefit if it is offered.
There are many other types of optional deductions, such as life insurance,disability insurance, and transfers to saving or investment accounts. These deductions will depend on the benefits offered by your employer and whether or not you choose to opt into those benefits.