It's Friday, payday is here and it's time to hit the town. You crack open your check, which, for some reason, is always lower than you expect. This is probably because when your wages are en route from your employer to yourself, the federal, state and local governments are helping themselves to a nice chunk of your cash. Here's a breakdown of what those little tax boxes mean.
The federal government requires your employer to deduct a certain amount of income tax money from your paycheck. Each pay period, the company accountant calculates your income tax rate and mails a check to Uncle Sam.
The W-4 form tells your employer how much to take out of your paycheck for tax purposes. The number of deductions you claim decides your withholding. The key to the W-4 is to claim the right amount of deductions to cover just what you owe so you're not overpaying or underpaying.
According to the tax software firm Quicken, if you earn very little or have enough exemptions and deductions that you predict you'll owe zero income tax, you can claim exempt. Claiming exempt means taxes aren't taken out of your check.
It's important to note that the federal government may not be the only one withholding income tax. Many states and local authorities impose an income tax and require withholding from its citizens.
Social Security and Medicare taxes sometimes show up on your check under the acronym FICA. FICA stands for the Federal Insurance Contributions Act.
In 1935, the government set up Social Security which could be considered a 'safety net' for all people when they hit retirement. Each paycheck's withholding amounts to a 12.4% contribution to Social Security. Every person must contribute 6.2% of his/her wages into the fund, and your employer matches that amount with another 6.2%. Social Security might appear on your check stub as OASDI, which means Old Age, Survivors and Disability Insurance.
Medicare is a government health care program for individuals who are 65 and older. You contribute 1.45% of your wages into the Medicare system. Your employer matches Medicare contributions as well.
Retirement, health insurance, disability insurance - these are examples of different types of deductions you might see on your paycheck. If you're curious about any of the taxes that have been taken out of your paycheck, do not hesitate to ask your company's payroll department, or seek out another professional who understands the system.