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Everything Deducted From Your Paycheck, Explained

Congratulations, you’ve earned your first paycheck! You’re probably excited, as you should be—you put in work, and have some cash in the bank to show for it. (See, adulting is cool sometimes!) But if you’re like many newly employed people out there, you might also be a little bit confused after running the numbers and noticing that your take-home pay isn’t exactly as much as you thought it would be.

What’s up with that? Upon further examining your paystub (or direct deposit slip) at your first job, you’ll notice a few line items categorized as “deductions.” Deductions are all of the things that were taken out of your gross pay, leaving you with your net pay, or take-home pay. While there are some deductions you can’t really control, others are part of your employee benefits package, so you can adjust them according to what works for you and your budget. (You have one of those, right?)

It’s OK to be a bit baffled on your first payday. We’ve all been there before. To help clear up the confusion, we broke down typical paycheck deductions, where your earnings are going, and how much control you have over it.

Federal Taxes

Federal taxes include all the taxes from the federal government, including your income tax and your contributions to social security tax and medicare tax.

The amount you’ll pay in federal income tax will be a certain percentage of your income, and depends on not only how much you make but also how many allowances and/or exemptions you claim on the W-4 form that you sign when you first start a job.

Richard Laviña, CPA and founder of tax-filing app Taxfyle, says that the best way to ensure you’re having the right amount of tax withholding each pay period is to talk with your company’s HR department. You can tell them if you’re single or married, and how many dependents you have, and they should be able to help you figure out how to fill out your form W-4 accurately. If you work at a small business without an HR department you may want to ask a financial planner for help.

The reason it matters? If you claim too many exemptions, you may not have enough taxes withheld and will owe the IRS more money than you planned for when it’s time to file your taxes in April, opening the door to penalties and interest. If you claim too few, you’ll get a nice refund come tax time, but miss out on enjoying that money throughout the year.

The amounts taken out of your paycheck for social security and medicare are based on set rates. With the 2019 tax code, 6.2% of your income goes toward social security, and 2.9% goes toward medicare tax — but, if you’re employed by a company full-time, they pay half of your medicare responsibilities, so you should only see 1.45% taken from your pay. These taxes are likely labeled FICA (which stands for Federal Insurance Contributions Act) on your paystub.

Now, things work a bit differently if you’re employed as an independent contractor or have any other employment status where your employer doesn’t withhold upon your pay, Laviña explains. He suggests consulting a CPA to make sure you’re paying your taxes properly and on time.

Along the same lines, you want to make sure you’re saving money throughout the year for taxes, as appropriate for your tax bracket.

Read more: If You’re a Recent Graduate Filing Your Taxes, Read This

State and local taxes

The majority of US states require you to also pay state income tax, which will be listed as another line item on your paystub. Some states may impose additional taxes — for example, California residents have a short-term disability tax deductions from their pay, Cristina Livadary, CFP, says. Similar to your W-4, you will fill out your state income tax forms once hired. 

On top of that, certain cities and counties require you to pay income tax to them. (Some don’t, and instead collect taxes solely by taxing homeowners.) The best way to find out if your state and city taxes its residents is by using an online calculator, says Livadary. She suggests this one from Smart Asset that can show your tax rate based on your income and where you live.

Investment account contributions

If you’re a full-time employee, your company may give you the opportunity to contribute to a retirement fund, like a 401(k). This money is a pre-tax payroll deduction, meaning that whatever amount you choose to contribute from each paycheck is deducted from your total taxable income, Livadary explains. “So say your salary is $50,000, and you contribute $5,000 pre-tax over the year to a 401(k), you’ll only be taxed as if you make $45,000.”

Laviña suggests always asking the HR department at a new job about the retirement plan they offer and whether or not they match—they may contribute a percentage of what you chose to contribute yourself, giving you some additional retirement savings.

Read more: 6 Reasons Why You Should Start Investing Right Now

Other employee benefits

Depending on the company you work for, you may have the opportunity to opt into a handful of other benefits, the costs of which are deducted from your paycheck automatically. 

If you sign up for your employer-provided health insurance, the cost will come out of your paycheck. Livadary notes that any company with over 50 employees is required to offer these benefits, and the HR department should provide you with details about each when you start. Typically, the company pays part of your insurance premium, though there are some companies out there that will cover it fully, leaving you with no monthly insurance premium deduction. Whatever amount you choose to contribute will be deducted from your paycheck as well.

Other benefits like commuter plans, life insurance, and disability insurance, may also be deducted from your pay, depending on whether or not you opt into them and if your employer picks up the bill fully or partially.

While you may be surprised to see deductions coming out of your first paycheck, once you know what number to expect to see in the bank, you’ll be able to plan and budget so that you’re using those paychecks in the smartest way possible.

By Amy Marturana Winderl

Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.