Congratulations! You landed your first job and just received your first paycheck. But what happened to all your money? Welcome to the world of work where paycheck deductions and withholdings take a chuck out of your paycheck before it gets to your bank account. Knowing about the different types of paycheck deductions and withholdings will help you to understand the reason your paycheck has fewer dollars in it than you expected.
A withholding is a mandatory amount taken out of your paycheck to pay income taxes for that period that you have already worked.
A deduction is an amount taken out of your paycheck for benefits and donations you’ve given your employer permission to take, such as for retirement, healthcare, or special funds.
Mandatory Payroll Withholding
There are some mandatory amounts that your employer is required to withhold from your paycheck. They do this to follow government regulations at the federal and state level. These mandatory deductions are taken from your gross pay and include payroll taxes (federal, state and local) and Federal Insurance Contributions Act (or FICA) taxes.
The Federal income tax that is withheld from your paycheck is used to pay for public services such as transportation, education, and the military. The amount you pay for federal income tax is calculated based on the information you enter onto your Form W-4 as well as the amount of your pay before taxes are taken out (gross pay).
State and local taxes are based on the state you live and work in. State income tax is a percentage of the money that you pay to the state and local government based on your income. In a few states, all taxpayers pay the same amount (flat rate tax) and some states don’t charge a tax at all. Just like federal taxes, state and local taxes go toward funding public services in the state and the locality.
The FICA tax is a combination of Social Security and Medicare taxes. Both you and your employer contribute equally to the FICA tax. The total amount withheld from your check each time you are paid is 7.65% of your gross pay. The amount collected for Social Security goes toward those who are already retired, the disabled, or to the families of retired, disabled or deceased workers. Medicare pays for hospital-related benefits like hospice care and home health care.
Voluntary Deductions
Depending on the type job you have, you might also have other deductions from your paycheck. Unlike the mandatory paycheck withholdings, you need to give permission to your employer to allow for voluntary payroll deductions.
Some voluntary deductions include health insurance premiums, retirement plans, and life insurance premiums. You might also need to pay for job-related expenses such as uniforms, meals or union dues.
Another important withdrawal is the amount you want taken out for your retirement account. These amounts can vary widely depending on where you work. Some employers do not offer retirement deductions.
Payroll and Human Resources
Always make sure you understand any documents you are asked to sign regarding voluntary paycheck deductions. Many employers only allow sign-up for these deductions once a year and if you decline these benefits initially, you might need to wait up to one year before you have another opportunity to opt in.
Make sure that you discuss and understand all voluntary deductions before you receive your first paycheck. If there is something you don’t understand, contact your payroll or human resources office or check with your supervisor for additional information. You can always call the state tax office or the Internal Revenue Service for more information. And you should always do your own research to become more knowledgeable about everything related to your pay and benefits!
