Understanding My Paycheck: The Basics TRiO Student Support Services Financial Literacy Spring 2016

Goals  Gross income v net income  Exemptions  Taxes  Understanding a basic paystub

Gross Income v. Net Income  Gross income and Net income are different.  Gross income is the complete amount of wages earned during a specific pay period before any deductions and withholdings are taken out.  Net income is the amount of money you take home after all deductions and withholdings have been taken out.

Deductions and Withholdings  Deductions and withholdings are items taken from the gross income. Deductions and withholdings  The amount of deductions and withholdings are dependent on what is reported on the W-4 form.  Examples of deductions:  Federal Income Tax  State and local tax  FICA Social Security  FICA Medicare  Insurance  Retirement Savings  Child support

What in the World is FICA?  Federal Insurance Contributions Act (FICA) tax: a payroll tax on income used to fund Social Security and Medicare imposed on both employees and employers.  Current FICA Social Security tax rate is 6.2% for the employee  Current FICA Medicare is 1.45% for the employee  Refer to the Topic 751 on the IRS website for more informationTopic 751

Taxes  Federal Taxes are deducted from your paycheck every pay period  Determined by completing the W-4 form upon employment  State Income Tax are also deduction from your paycheck each pay period  Currently only seven (7) states do not have a state income tax:  Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming.  Tennessee and New Hampshire only tax interest and dividend income.

Sample 2015 W-4 Form

What are Exemptions?  Exemptions: also called allowances, are deductions that reduce or eliminate your obligation to pay tax (TurboTax 2016)(TurboTax 2016)  Example of exemptions (allowances):  You  Your spouse  Dependent(s)  Child care expenses  Child tax credits  Itemized deductions

Reading Your Paycheck

Sample Paycheck Stub - Basic  Paycheck Stub – is included in each pay period and describes earnings and paycheck deductions.

Sample Paycheck Stub – Pay Period  Pay Period – the period of time in which the employee’s wages are earned. Pay periods can be weekly, bi-weekly, twice a month, or monthly.  The last day of the pay period is not always payday.

Sample Paycheck Stub – Gross Income  Gross Income – the total amount earned by the employee during the specific pay period.

Sample Paycheck Stub – Net Income  Net Income – the total amount paid to the employee after all deductions have been taken out during the specific pay period.

Sample Paycheck Stub - Deductions  Deductions – money subtracted from the gross pay. Deductions include taxes, exemptions, benefits and/or retirement benefits, and any other deductions reported by the employee.

Sample Paycheck Stub - Taxes  Federal Withholding Tax – the amount by law employers are required to withhold to pay taxes  The amount deducted varies depending on the amount earned and information reported on the W-4 form.

Sample Paycheck Stub - Taxes  Federal & State Withholding Tax – the amount withheld by the employers by law to pay taxes.  The amount deducted varies depending on the amount earned and information reported on the W-4 form.

Sample Paycheck Stub - FICA  FICA – tax used to fund Social Security and Medicare  FICA Social Security and FICA Medicare can be combined as one line item or separately on a paystub

Sample Paycheck Stub - FICA  FICA – tax used to fund Social Security and Medicare  FICA Social Security and FICA Medicare can be combined as one line item or separately on a paystub

Sample Paycheck Stub – Year-to-Date  Year-to-Date – the total amount of deductions that have been withheld from an employee’s gross pay since January 1 to the last day of the pay period.

Sample Paystub with Deductions