Where’s my money going? Understanding your paycheck deductions

Does your paycheck end up disappointingly smaller than expected? All those deductions are hard to decipher, but understanding your pay stub lets you know where your cash is going and why. Pay stubs differ depending on your employer and state, but we’ve broken down the basics for you here:

Before and After
Gross Pay: The total amount you earned before deductions.
Net Pay: The remaining amount after deductions.

W-4 Form
Little did you guess that W-4 form your employer gave you your first day at work would be so important. The number of allowances and exemptions you claim on your W-4 affects how much is deducted from your wages in federal and state taxes. The withholding allowance depends on marital status, the number of dependents you have, how many jobs you have, and what types of tax credits you are eligible for. Talk to your employer to adjust your W-4. If there is an event that would decrease your withholdings, such as a divorce, you are required to resubmit your W-4 within 10 days.

Deductions
Federal, State and Local Tax

Federal taxes can eat up 10 to 35 percent of your paycheck. They support the federal government, the military and other initiatives.
State and local taxes generally take a smaller bite out of your check, and go to fund things like roads, libraries, and schools.

FICA
The Federal Insurance Contributions Act (FICA) tax is paid by every employee and funds Social Security and Medicare programs.

You might see the FICA/Social Security tax labeled as OASDI (Old Age, Survivors and Disability Insurance), Social Security, or just plain FICA. Medicare is listed separately because it has different withholding rules than Social Security.

Retirement
Some companies allow you to contribute to retirement plans, such as a 401(k) or an Individual Retirement Account (IRA). Tax rules vary for each plan and your choices will affect your future savings, so make sure you talk with a reputable financial adviser. Your local credit union can be a good place to start learning more.

Health Insurance
When employers offer health insurance and you decide to use it, you might have to pay part of the cost. You might be able to have insurance costs withheld pre-tax as well. This deduction can be much cheaper than paying for insurance with after-tax dollars and worth the smaller paycheck.

Other
Other deductibles your employer might offer you include parking fees, charitable contributions, dependent care, union dues, and disability insurance. They decrease your paycheck, but might help your overall budget.

When you get your next pay stub, make sure you understand where your money is going. Every month the average person’s paycheck has $185 unnecessarily withheld, so double check, make adjustments, and put your money to better use.

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