You worked 40 hours at $20 an hour, so your paycheck should be $800, right? Then you look at your pay stub and see $623.47. Where did the rest go? Understanding your paycheck deductions is crucial for managing your money effectively. Let’s break down where your money goes.
First, federal income tax. The amount withheld depends on how much you earn and what you put on your W-4 form when you were hired. This form tells your employer how much tax to withhold based on your filing status and dependents. If too much is withheld, you’ll get a refund when you file taxes. If too little is withheld, you’ll owe money. Most people aim to break even, but getting a small refund isn’t terrible – it’s forced savings, even if the government doesn’t pay you interest.
State income tax varies widely. Some states have no income tax at all (like Texas and Florida), while others have rates that rival the federal government (like California and New York). This is a major factor in your take-home pay and something to consider if you’re thinking about moving.
Social Security tax takes 6.2% of your wages up to a certain income limit ($168,600 in 2024). This funds retirement benefits for current retirees. Medicare tax is 1.45% of all your wages with no income limit, funding health insurance for people 65 and older. Your employer matches these amounts, so the government actually gets double what you see deducted.
If you see FICA on your pay stub, that’s the combined Social Security and Medicare taxes. Self-employed people pay both the employee and employer portions, which is why their tax burden is higher – they’re paying 15.3% instead of 7.65%.
Health insurance premiums are often deducted pre-tax, which saves you money. If your premium is $200 per paycheck and you’re in the 22% tax bracket, you’re really only paying $156 after the tax savings. This is why employer-sponsored health insurance is so valuable.
Retirement contributions to your 401(k) or similar plan also come out pre-tax (for traditional contributions). This reduces your taxable income now, though you’ll pay taxes when you withdraw in retirement. Some employers offer Roth 401(k) options where contributions are after-tax but withdrawals in retirement are tax-free.
Other common deductions include life insurance, disability insurance, flexible spending accounts for healthcare or dependent care, and commuter benefits. Some of these are pre-tax, some are after-tax. Your pay stub should clearly label each deduction.
If you notice something wrong with your paycheck, speak up immediately. Payroll mistakes happen, and they’re much easier to fix right away than months later. Keep your pay stubs for at least a year, and compare them to your W-2 when it arrives to make sure everything matches.
Understanding your deductions helps you make informed decisions. Should you adjust your tax withholding? Are you contributing enough to your 401(k) to get the full employer match? Could you save money with a flexible spending account? These questions are much easier to answer when you know exactly what’s coming out of your paycheck and why.
