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How to Keep Payroll Deductions and Taxes in Check

You’ve landed a job and earned your first paycheck.

But before you file away your pay stub, be sure to review the numbers. It’s good to know how much money is coming out of your paycheck, where it’s going, and whether or not you can keep more of it in the bank.

There are two types of deductions that come out of your check: required and voluntary.

Required: Uncle Sam’s Share

As you probably know, part of your check goes to the government. Depending on where you live, you may be required to pay up to four different government taxes:

  • FICA taxes (mandated by a law called the Federal Insurance Contributions Act) are required contributions you make to Social Security and Medicare.
  • Federal income taxes are required taxes that go to the federal government. They are calculated as a percentage of your income; past rates have ranged from 10 percent to 39.6 percent.
  • State income taxes go to your state government and vary by state.
  • Local taxes are levied by some cities and can include an occupational tax, which you pay if you work in that city (regardless of whether you live there or not).

Don’t Forget: Check the Numbers

If you’re paying too much in taxes, you’ll get a bigger refund check after filing your return, but less money in every paycheck to cover expenses.

To make sure you’re not overpaying (or underpaying), check the W-4 form you filled out when you started your job, and revisit it when you make major life changes such as getting married or buying a home. The fewer allowances you claim, the more taxes are taken out.

Voluntary: Stretching Your Paycheck

Your employer might allow you to put away some pretax money to help pay for health care, child care, or retirement savings. These contributions come straight out of your paycheck before taxes and count as voluntary deductions. Taking advantage of these programs will reduce your taxable income, making your paycheck go further.

Take a tour of a sample paycheck and see where your deductions are listed. To figure out what your paycheck will look like after taxes and other pretax deductions are taken out, use the CashCourse Paycheck Analyzer.

[Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by CashCourse or the National Endowment for Financial Education. These courses and related resources may be used only for nonprofit, noncommercial educational purposes. CashCourse makes every effort to keep the information in these courses current, but, over time, new developments as well as legislative and regulatory changes may date this material. If you discover inaccurate information, please contact us.]

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