How Do Taxes Affect Your Paycheck?

Have you ever looked at your paycheck or end-of-year bonus and been surprised by the taxes that were deducted? Well, many others have been in the same situation. Taxes are a welcome to the workforce notification. Let's see the distinction between the money you earn and what you take home.

Image of Income Graph with Question Mark

Gross Pay

Your gross pay consists of the total amount of money you earned for a particular pay period before deducting any taxes. So, if you make $60,000 a year and receive your pay semi-monthly, your gross pay would be $2,500. Your gross income may show as salary or regular earnings on your pay stub. Your gross pay can differ if you are paid hourly and work fluctuating hours.

Federal Income Tax

Federal income tax is a mandatory deduction and will vary based on the completion of your W-4. The IRS has a tax withholding estimator that can guide you in estimating your withholding. If you withhold too little, you may end up paying back the government during tax time. If you withhold too much from your gross pay, you could receive a tax refund. Having a large tax refund is rarely beneficial, so it's essential to estimate carefully.

State Income Tax

Not all states require taxes to be deducted from your gross pay. For example, Alaska, Florida, and Texas are three of seven states with no state payroll tax requirements. States that do have payroll taxes have specific state or local tax forms. Taxes also will vary by state and are deducted from your gross pay.

Social Security Tax

The Social Security tax is used to supplement an individual's retirement. This tax is deducted while working and can be drawn as early as 62 years old. The Social Security tax is mandatory, and your employer also must contribute an equal amount on your behalf. You can multiply your gross wages by 6.2 percent to calculate your current contribution. You can see your total social security contributions by registering with the Social Security Administration.

Medicare Tax

Medicare Tax is similar to social security tax since you cannot use it until you meet specific age requirements. Medicare is a federal health insurance benefit for individuals over 65 years old. The Medicare tax is a mandatory contribution deducted from your gross pay. Like the Social Security tax, your employer must also match your contribution. The current Medicare tax rate is 1.45% for you and your employer.

Net Pay

There you have it! You've received your net take-home pay after applicable taxes. Child support, medical, retirement, or other deductions could reduce your net pay further. However, these are the legitimate reasons you may see a discrepancy in your gross and net pay.

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