Americans are woefully uninformed about money, economics, and taxes. No good can come from this, so we at Van Wie Financial are dedicated to improving that situation. Some argue that taxes are boring, complex, and difficult to understand, but others love to talk about (and dream about) money. Too many people are seemingly content to complain when their money runs low, or worse yet, runs out.
Common wisdom says that the quickest way to make more money is to save more money. Step 1 in learning about money is to analyze your own spending to see where you might make cuts. Most young people believe that the process begins with your “take-home pay.” After all, that’s what you have available to spend between paydays, right?
By the time you receive your payday spending money, your earnings have been reduced, and often sharply. Examine your most recent Form W-2. For starters, there is mandatory withholding, often called payroll tax.” It is really not a tax, but rather a compulsory insurance premium. The Social Security tax component (also called FICA) pays into your account at Social Security, and the Medicare tax component similarly goes to your future Medicare benefits. With these items, your earnings have already been reduced by 7.65%, up to the current earnings limit of $168,600 for FICA, though Medicare withholding applies to 100% of earnings. Your employer paid an equal amount on your behalf.
Moving along on your W-2, there are boxes for Federal Tax Withheld, and in some states, State Tax Withheld, over and above the Payroll Taxes. Income above a modest Standard Deduction is taxed at the Federal level. Some of your earnings are sent to the U.S. Treasury every paycheck, because the government wants their share at the same time you get yours. Remember, we haven’t even discussed any Fringe Benefits you receive as part of your employment, some of which may require partial payments from you. You may see deductions for Health and/or Life Insurance, Dependent Care, and a host of others.
Only after these sums are gone do we find voluntary paycheck reductions for you, most popularly 401(k) deferrals from current pay. This amount will vary, and you are in control. How do you decide the optimal level of contributions? That requires some analysis of the Tax Code and its application to your situation.
What better way to save money than to understand your “paycheck?” With electronic payroll, you may have to hunt for the electronic pay stub, though your employer will direct you to it if necessary. You may be surprised to see how much you are really paid, and how little is left over for you.
Didn’t get a W-2, but a 1099 instead? We’ll cover that next week.
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