The Paycheck – Deductions, Taxes and Take Home Pay
In the sample paycheck below we are going say that our employee Jasper is paid $20 per hour and he worked 25 hours for two weeks bringing his gross pay to $500. This is the number that tax is taken from.
To start, here are automatic deductions from everyone's paycheck:
Social Security or FICA: This is for people who are elderly, and this money can be taken as early as 62 years of age. Your check pays into the system to fund it.
-This is an automatic tax of 6.2%
Medicare tax: is also designed for the elderly to pay a large portion of their medical benefits.
-This is an automatic tax of 1.25%
Federal tax: this is money that goes to the government to fund the country to run its operations. This is not an automatic number because what you will owe to the IRS is based on your total earnings for the year.
When you start your job you fill out a W-4 form where you choose the number of exemptions that determines how much tax will come out of your check. You can determine if you are pay enough tax by using the IRS’s tax withholding calendar.
It is important to understand that it you don’t pay enough tax during the year, then you will owe that back to the government.
So, for the sample check 6% has been take out.
State tax: most states have tax except for the following: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
You will need to do an Internet search to know what your state tax is. Like the federal tax, you should fill out an exemption form and if you don’t pay enough in during the year, you will owe it back.
For example, Jasper’s check is in Michigan and the tax is 4.25%
The total tax is $88.5 taken from $500 leaving a net paycheck of $411.50
To check if your state tax is correct, take your most recent paycheck find the tax withheld and divide that by the gross amount. $21.25 / $500 = 4.25%
*Note - city tax may apply depending on your work location.
Let’s do the tax breakdown:
Gross pay: $500
For Medicare: $500 x 1.2% = $6.25
For Social Security: $500 x 6.2% = 31%
For Federal: $500 x 6% = $30
For State: $500 x 4.25% = $21.25
The total tax is $88.5 taken from $500 leaving a net paycheck of $411.50
To check if your state tax is correct, take your most recent paycheck find the tax withheld and divide that by the gross amount. $21.25 / $500 = 4.25%
As mentioned earlier, to ensure that you are paying enough to the IRS, use their estimation tool. In this paycheck example, more tax is being taken out than required and would result in a tax return at the end of they year.
