A guide to common paycheck deductions and withholdings
You work hard for your money, and at the end of every week (or every two weeks), it can be a bit dispiriting to look at what you get paid and the amount you actually bring home. Why does your take-home pay shrink so much? What do all those deductions mean? Here’s a brief guide to the common deductions and withholdings you see each payday.
That’s the money the federal government takes to meet spending and interest payments. The federal government doesn’t want to assume that you will have the funds available when taxes come due on April 15th, so it requires pay-as-you-go withholding. FICA and OASDI Withholding: This represents your payments into Social Security, (FICA is the acronym for Federal Insurance Contributions Act, and OASDI stands for Old Age, Survivors and Disability Insurance), a mandated retirement savings program for when workers retire. This program also provides benefits to survivors of workers and disabled workers. Your employer makes a matching payment.
It might appear as FICA-HI on your paycheck. The funds support health care for retirees. Employees and employers alike contribute 1.45% of pay, with no ceiling. Further, employees who have wages over $200,000 (single filers) and $250,000 (joint filers) must also pay an additional 0.9% Medicare tax on their wages that are above these thresholds. There is no employer share to this additional Medicare tax, but employers must withhold it from applicable employees’ paychecks.
Only nine states do not tax wage income. (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income taxes. New Hampshire, however, taxes interest and dividends, according to the Tax Foundation. It has passed legislation to begin phasing out that tax starting in 2024 and ending in 2027.)1 Most Americans will see withholdings for state income tax, which will vary, of course, from state to state.
Some working Americans are required to pay local income taxes in addition to federal and state income taxes. If you fall into this category, you will see a deduction for taxes levied by a local government. You may also see any number of other deductions or withholdings, many of which are voluntary, like 401(k) contributions and employer health care insurance premiums.
The paycheck’s journey from “gross pay” to “net pay” may not always be ideal, but when you consider the alternative is unemployment, the picture may seem a bit brighter.
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