Personal Finance / Unit 1: Earning Income
1.3 Paychecks and Deductions
Notes
A pay stub shows gross pay, each deduction and net pay. Know what each line means.
- Income tax (federal, and in many places state) is withheld based on your earnings and your W-4.
- FICA taxes fund Social Security and Medicare. They are payroll taxes taken from each paycheck.
- Voluntary deductions you choose include health insurance premiums and retirement plan contributions.
- A pre-tax deduction (such as a traditional retirement contribution) lowers the income that is taxed.
- Example with made-up rates: 8% payroll tax on $1,000 gross is $1000 \times 0.08 = 80$, so $80.
- Employers also pay payroll taxes on your behalf, but that part is not taken from your check.
Practice
Which of these is a voluntary deduction?
Employees choose benefit plans; taxes are required.
A worker has $1,200 gross pay. Payroll tax is 8% of gross and income tax withheld is 10% of gross. What is the net pay?
Deductions are 18% of $1,200, which is $216. Net pay is $1200 - 216 = 984$.
What do FICA taxes pay for?
FICA is the payroll tax that funds Social Security and Medicare.
Ready for more? Take the Unit 1 test.