Do you ever wonder what all those deductions are on your paystub? In a perfect world, you would take home every dollar you earn. In the real world, things don’t work like this.
There are a variety of paycheck deductions, some federal, some state, and some local. Furthermore, some deductions, such as those for retirement contributions, are a matter of choice.
First off, there are four categories of taxes, which are:
- Federal withholding, based on your W-4 form and how much you earn.
- State withholding, based on W-4 form and how much you earn.
- Local Tax
Addtionally, every worker in the U.S. must contribute 6.2 percent of their paycheck to social security and 1.45% to Medicare. Both of these contributions are matched by employers for each employee.
Related Article: 13 Genius Tax Write-Offs You Need to Take Advantage Of
Local and state tax can vary greatly depending on where you live. A handful of states do not have income tax, as opposed to California, which is the highest at a whopping 13.3 percent. Think no income tax sounds pretty great? You might want to consider moving to Florida, Nevada, South Carolina, South Dakota, Tennessee, Texas, Washington or Wyoming.
Additionally, things like insurance and your retirement contribution will vary largely depending on your employer and the various plans you choose to elect. While it is required that you have in insurance in the U.S. under the Affordable Care Act, it is not required that you elect your employers options. Similarly, you are not required to elect to contribute to your 401(k), but it is highly recommended to do so.
Check out our infographic below to learn what all those deductions really mean, and where your money is actually going.