Guess what? You’ve got three extra days to figure out your paycheck deductions and file your tax returns this year. Yup. Due to some magic in the calendar and “Emancipation Day”, tax day is Tuesday, April 18th.
Taxes fund our military, the roads we travel on, they help support firefighters and law enforcement, along with myriad other benefits that we may take for granted.Â Knowing that your hard earned money supports law enforcement and their family may make you feel good, butÂ it doesn’t change the fact that you may still cringe from time to time when we see how much of your paycheck goes to taxes. A salary of $50,000 a year, paid every two weeks or 26 pay periods is $1,923.07 each paycheck, right? Wrong. Your gross pay is $1923.07, but that is the amount before a number of withholdingsÂ have been taken from your paycheck and youâ€™re presented with your net pay.
What are some of these common paycheck withholdings? Enjoy this helpful guide to understandingÂ paycheck deductionsÂ for taxes and insurance.
Federal, State, and Local Taxes
They say there are only two guarantees in life: death and taxes. Every American worker pays Federal taxes and most of what you pay is typically withheld from your paycheck automatically based on the information you entered on form W-4 when you started your job. Depending on where you live and work, you may also have state and local city or county taxes withheld from your paycheck.
When you file your taxes at the start of the year, you may get a portion of those withheld taxes back or owe more. That depends on your W-4 withholdings and how much you earned.
A lot of people wonder, â€œwhat is FICA on my paycheck?â€ FICA stands for Federal Insurance Contributions Act. In simple terms, FICA is the withholding for Social Security and Medicare, two of the nationâ€™s most popular Federal insurance programs.
For every dollar withheld for FICA that you pay, your employer is also making contributions on your behalf. While it feels like a lot today, your FICA deduction is a form of retirement savings. When you retire in the future, you will have access to health insurance and a monthly check from these programs, so you will eventually get paid back for your contributions.
Health, Dental, and Vision Insurance
While most Western countries give their citizens access to a universal healthcare system, Americans are on their own to ensure their families are covered. The most common way to get these types of insurance is through an employer. While the employer typically contributes a large portion of your health insurance costs each month, the worker generally pays a portion of the monthly cost as well.
Even if you are healthy and rarely visit a doctor, an unexpected injury or illness could leave you bankrupt if you donâ€™t have quality health insurance. The average hospital stay costs $10,000 per day, so a serious illness that puts you in the hospital for five days without health insurance costs as much as most US families make in an entire year. Going without that deduction is an expensive gamble.
Life insurance from your employer typically isnâ€™t enough to meet your entire life insurance need, but you can typically get a policy at a very low cost if your employer offers life insurance as part of the benefits package.
Employer life insurance plans generally offer a multiple of your gross income at a very low monthly cost. Joining a workplace life insurance plan is rarely a bad decision, but make sure you have enough coverage to meet your familyâ€™s full needs and remember when you leave your job you canâ€™t take your policy with you. Speak with a life insurance expert and make sure youâ€™re getting the right life insurance policy at the right price.
Many employers work with nonprofits to allow their employees to make automatic payroll deductions for nonprofit donations. Through partnerships with the United Way and similar organizations, you can send $5, $10, $20, or any amount you want to your favorite charities every payday.
These types of programs are voluntary, but it is a great way to support your local community and enjoy a pre-tax deduction, which means you do not pay taxes on the amount held from your paycheck.
Retirement, Investments, and Savings
In personal finance, there is a concept called â€œpaying yourself first.â€ The idea is that you contribute to your savings and investments first and then pay your bills later. This ensures you do not spend so much today that you struggle with retirement later.
Large employers generally give the option to save in a 401(k) or 403(b), the most common retirement savings plan available to American workers today. Some employers also offer discounted stock purchase plans, flexible spending accounts (FSAs), health savings accounts (HSAs), and other options that help guarantee you can enjoy the same standard of living in retirement that you enjoy today.
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