Have you ever gotten a new job or a raise only to realize that when payday rolls around you’re taking home a whole lot less than you were expecting? Have you ever thought, “why is my paycheck so small?” While we all expect to pay taxes on our wages, most people couldn’t tell you what all of the line items on their pay stub are. Here we cover some of the most common items affecting your take-home pay.
Oh, taxes. You are the one constant in our lives and yet keeping track of all the payments we need to make can be a daunting task. From a paycheck perspective, what you see deducted from your wages are your estimated federal, state, and potentially local taxes. These are calculated based on the Form W-4 that your employer required you to fill out at the start of your employment. It essentially tries to understand any large exemptions and deductions you may have so that it can adjust the amount of taxes withheld from your paycheck appropriately, but it’s really up to you to ask questions and update the form when life events such as marriage and kids come along.
In addition to these “normal” taxes, a large portion of your wages will be automatically withheld as part of Federal Insurance Contributions Act (FICA). This may be listed on your paycheck as FICA or it could say Social Security and Medicare Tax. These are your required payments into the social security and medicare system. Eventually you’ll reap the benefits of this money when you’re able to draw on Social Security and Medicare for your own benefit. You can learn more about monitoring your benefits here. The Social Security tax and Medicare tax are both based on a percentage of your wages. The Medicare tax is 1.45% of your total wages, and the Social Security tax is 6.2% of your wages in 2017. There is, however, a limitation on the Social Security tax. Wages over $127,200 in 2017 should not be subject to the tax, though the Medicare tax will still apply.
Medical and Dental Insurance
The next costs you may see coming out of your paycheck are medical, dental, and vision insurance premiums if you are required to pay these through your employer. These are the premiums that you need to pay to keep that coverage as opposed to what your employer may pay on your behalf. As far as determining your tax liability for the year, these premiums are considered deductions from your salary and therefore will not be included as taxable income.
Pre-Tax Savings and Deductions
A few other items that you can elect to have withheld from your paycheck include retirement benefits and college savings. For instance if you participate in a Traditional 401(k) plan, your contribution are pre-tax and therefore should be withheld from your paycheck automatically. The typical annual contribution limit for a 401(k) plan is $18,000 though some exceptions may apply. If you notice that more than $18,000 has been contributed during the year, you have until April 15th of the following year to correct the problem or the excess contributions will essentially be double taxed. On the other hand, if you’re contributing to a Roth 401(k), the contribution will still be deducted from your paycheck, but it will not be pre-tax as the benefit of this account is that you pay the tax upfront to avoid paying tax at the time of your withdrawal.
Additionally, if you have chosen to contribute to a 529 college savings account, you can automate these payments so that they are contributed to your account by your employer and avoid a level of taxation. Talk to your 529 plan administrator. Most will have an automatic contribution form which you can present to your contact in Human Resources in order to get the pre-tax savings.
Surprising Taxable Benefits
Lastly, you may receive some benefits from your employer that make your life better, but are sneakily taxable. For instance, if your employer provided you with meals at work, that may be taxable and show up as a taxable benefit on your pay stub. Other common items that may be taxable in excess are education and group term life insurance. In the case of education costs paid by your employer, they can pay up to $5,250 annually towards certain education cost without it causing a taxable event for you. Any amount in excess of the $5,250, however, will be included in your federal income. Group term life insurance is similar. Your employer can pay for coverage on your behalf for a policy worth up to $50,000, but to the extent that the payout benefit is greater than that amount, those premiums will be taxable to you. Note that this may show up on your paycheck as GTLI.
When You Should Talk to Human Resources
Although it’s easy to lose sight of what’s coming out of your paycheck when it may be directly deposited into your bank account each pay period, it’s good to take a look at what’s happening when possible. This is especially important when it comes to starting a new job. Make sure your 401(k) contributions are under the annual limitation and that local taxes are being withheld if you are subject to those. Also, be sure to talk to your Human Resources representative if you have questions about your W-4 or changes you would like to make. Staying on top of these things regularly can save you a bit of a headache when tax season rolls around.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.