Whip it out—your paycheck, that is.
Whip it out—the paycheck you received on Friday, that is.
It’s not to say you can’t trust your employer to get your paycheck amount right … but as they say in accounting, “trust but verify” is never a bad idea. Here’s a quick breakdown of your paycheck and how it all works.
The components of a paycheck
Gross pay: The total amount of money you earned during the pay period before payroll deductions. Nothing gross about that.
Payroll deductions: Any money your employer withholds from your paycheck for taxes, contributions to retirement, health insurance and savings plans, or benefits. This is arguably gross.
Federal income tax withholding: Money that your employer takes from your paycheck and remits to the government to pay your federal income taxes. You influence deduction amounts for federal income taxes when you fill out your Form W-4 when you first start your job. Tip: You can adjust your withholding at any time by handing your payroll administrator a fresh W-4. Any discrepancy between how much you owe in federal income taxes and how much was withheld during the year is paid or refunded when you file your taxes.
State income tax withholding: Same thing as federal income taxes but for state income taxes. Instead of filling out a Form W-4 to instruct your employer on how much to withhold, you fill out a state withholding tax form.
Medicare tax: A 1.45% tax on your gross pay minus eligible deductions (health, dental, and vision insurance are all Medicare tax exempt). An additional 0.9% tax applies on wages above $200,000 for single people or $250,000 for those married filing jointly.
Social Security tax: A 6.2% tax on wages minus eligible deductions (same ones as Medicare, generally). The tax only applies to your first $147,000 of income in 2022; it goes away after that … though the Social Security Administration has proposed raising or eliminating that cap to keep its trust funds solvent. Note: Medicare and Social Security taxes are known collectively as Federal Insurance Contributions Act (FICA) taxes.
Health, dental, and vision insurance deductions: In the U.S., most employers with over 25 employees must offer subsidized health insurance plans to their employees. Most employers pay at least something into the premiums. Health, dental, and vision insurance deductions are exempt from federal, state, and FICA taxes.
Retirement contribution deductions: Any money you contribute to an employer-provided traditional 401(k) plan. Traditional 401(k) contributions are federal- and state income tax-deferred, so you’ll pay income taxes on them when you withdraw the money in retirement. If you opt for a Roth 401(k), the contribution is subject to income tax withholding today, but you won’t pay any income taxes upon withdrawal in retirement. All 401(k) contributions are subject to FICA taxes today, however.
Flexible spending account (FSA) or health saving account (HSA) contributions: These are accounts that let you pay for qualified medical expenses using pre-tax dollars. Money you put into an FSA generally has to be spent in a given period before going poof, but HSA money sticks around until you want to spend it. There’s so much more to discuss, but we don’t have the room here. Keep reading about them here.