We all know the feeling: it’s payday, you rip open your paycheck envelope (or check your direct deposit) and your take-home pay is half what you expected! What happened to all that money? Where does it go?!?
The short answer is: Taxes.
A bunch of taxes.
But what are they and what are they for? Let’s take a look at the biggies:
- Social Security and Medicare
- Also known as FICA, these taxes go towards covering income and medical coverage for those over 65 and are calculated as a set percentage. This means that no matter what you earn in a pay period, you pay the same percent of FICA tax. There is, of course, an exception to this, but more on that later.
- Federal Income Tax (FIT)
- The percentage you pay depends on how much you earn. The funds collected from Federal taxes pay for pretty much whatever the government wants them to.
- State Income Tax (SIT)
- Like FIT, the percentage isn’t fixed, and the money funds whatever the state (or the voters) decide it should.
- State Disability Insurance (SDI)
- This is a payroll tax funded program to provide injured workers with additional income while they are out of work.
- Local Income Tax
- On top of SIT, many counties, cities, or even school districts will have additional taxes that are used to fund municipal projects.
Fun with FICA
If you check out your pay stubs every now and then, you might notice amounts taken out for Social Security and Medicare. These taxes are part of the (Jargon Alert!) Federal Insurance Contributions Act, also known as FICA. Both these programs are in place to help folks who have reached retirement age. Social Security helps to provide additional income and Medicare makes sure they have access to medical coverage. We all pay into these programs on every paycheck.
- Social Security tax is withheld at 6.2%
- Medicare comes in at 1.45%
Unlike federal (and state) withholding, you most likely won’t see FICA tax money again until you start collecting Social Security, but, hey, at least that gives us something to look forward to!
Federal Income Tax: FIT as a Fiddle
Federal Income Tax is one of the main tax withholdings taken out of your paycheck. Unlike FICA taxes, federal withholding isn’t a set percentage, so figuring out how much FIT will be withheld can get pretty wild.
The amount of withholding is based on a couple of different bits of information:
- The allowances you claim on your W-4 (Remember that funky form you filled out when you started your job?)
- Whether you are “Single” or “Married”
- How often you get paid
- How much you made this pay period
Based on the info you give, your employer, or their payroll company, more likely, uses the IRS withholding tables to figure out how much to keep out of each paycheck.
It breaks down like this: the more you make in a given pay period, the more they take out for Federal Income Tax, so if you work a bunch of overtime, or get a bonus, you can get hit with some serious FIT. Payroll companies don’t look at your earnings for the year when they figure how much to withhold, so this is the way they make sure you don’t come up short at the end.
The good news is that if you have too much federal tax withheld you will get it back as a refund when you file your taxes, but who wants to wait that long?
State and Local Taxes: A Grain of SALT
If you’re clever enough to live in one of the states that doesn’t have any income tax you won’t see much of this one, but you may run into a local tax here and there.
State withholding is figured in basically the same way Federal tax is calculated, but each state has its own set of withholding tables. Like FIT, if you have too much state tax withheld, you’ll get it back when you file your taxes.
State Disability Insurance
Another line you may see on your paystub is State Disability Insurance. Most states have some version of SDI in place to help provide income to workers who get injured and are unable to work for a while. Generally SDI is a fixed percentage, and if you ever end up out of work due to an injury you’ll be glad to have paid it!
Locals Only!: Local Tax
Local taxes can be set percentages or varied like FIT and SIT, depending on where you are. You may even see different taxes withheld for where you live and where you work! On top of all that, some areas have school district taxes, which help to fund schools.
An Example:
Say you make $15.00 an hour and you get paid every two weeks, giving you a total “gross pay” of $1,200 for each pay period. Your paystub might look something like this:
Gross Pay: $1,200
Federal Income Tax $119.00
Social Security Tax $74.40
Medicare Tax $17.40
State Income Tax $25.82
Leaving you to take home $963.38 after all the taxes are taken out.
The Bottom Line
These taxes can add up, so it’s not surprising that so many of us wonder where all of our money went!
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