When we talk about maximizing earnings, it’s not just about making better wage or working more. Keeping more of what we earn is just as important.
Remember when you received your very first paycheck and maybe the surprise that someone named FICA was taking your hard earned money? Then there were the Fed, State, and Locals got a cut too! The reality is that the wages we make (gross) are not what we get (net or take-home pay). It is important to know just who is taking their share before you get yours.
In the previous section, we talked about both cash and non-cash of income and resources that may be coming into your household. If you haven't done so, click What Comes In: Add It Up and write down the amounts of the cash and non-cash resources you earn and/or receive on a monthly basis to calculate your gross monthly income. Now let's look at some common deductions from pay and/or other sources of income.
Taxes Withheld
FICA (Federal Insurance Contribution Act) which is otherwise known as social security. You may see it broken down as OASDI (Old Age Survivor, and Disability Insurance), in which a tax of 6.2% is applied and withheld to a maximum of $118,500 of earned income (2016), and Med(icare) in which all of your earned income is taxed and withheld at a rate of 1.45%. (There is an additional Medicare tax of 0.9% which some high-income taxpayers are required to pay.)
Federal income tax is withheld according to the withholding allowances you claim on the IRS Form W-4.
State income tax is withheld at flat rate of 3.09% in Pennsylvania.
Local income tax is withheld at a rate set by the municipality in which you live.
Local (working) privilege tax is withheld at a rate set by the municipality in which you work.
Employee Benefits
Health insurance premiums and related benefits such as flexible spending accounts, health savings accounts, etc.
Other insurances including life, disability, long-term care, etc.
Dependent insurances, usually life
PA Unemployment insurance
Retirement savings such as 401(k), 403(b), 457 plans, etc.
ESOP's (employee stock options)
Pre-Tax Deductions
Health insurance premiums and related benefits such as flexible spending accounts, health savings accounts, etc.
Retirement savings such as 401(k), 403(b), 457 plans, etc.
Cafeteria plan items, not including health and retirement savings
Garnishments
Child support
Tax liens
Student loans in arrears
Note that your actual deductions may be different depending on your situation. The most important thing is that you know and understand your deductions and all of the other important information included on your pay statement. The next section will analyze a sample pay statement and introduce a useful worksheet to help in this process.
Next Up: Understanding Your Pay Statement
