Do You Understand Your Paycheck Tax Deductions?
We all look forward to receiving our paycheck. We can calculate from the number of hours we worked on our salaried amount how much we should get paid. When the check comes, the amount on the bottom line is always less than anticipated. We see a list of abbreviations on the side for deductions made to our gross pay, but what is the difference in all those amounts?
Let’s start with social security. There is always a debate going on about this. Younger employees argue that they shouldn’t be taxed for it since the system will probably have run dry by the time they reach retirement age. They will never see a penny.
This may or may not be accurate, but an employer must pay into the social security fund. Each employer pays a certain percentage into the Old Age, Survivors, and Disability Insurance (OASDI), and the employee is taxed for the rest. It is required by law for them to do so. Self-employed individuals must pay 12.4 percent towards this fund since they are considered employers and employees of their enterprise.
FUTA represents the Federal Unemployment Tax Act. In combination with state systems, this system provides money for people when they are unemployed and looking for work. Employers are required to pay into this fund for their employees. They are responsible for paying 6.2 percent of the first $7,000 of taxable wages for each employee. Employees pay nothing.
Companies are rewarded for this contribution with a deduction on their taxes. They can claim a deduction equal to their state contribution to FUTA. In addition, they can also claim a deduction equal to the difference between what they paid at 6.2 percent and what they would have paid if the state rate was 5.4 percent.
Income tax is the amount of money owed to the IRS by you each year. The government taxes your earnings at a specific rate. One determining factor for this rate is the filing status of the individual. There are five statuses: Single, Married Filing Separately, Married Filing Jointly, Qualified Widow with Dependent, and Head of Household. Single and Married Filing Separately is taxed at the highest rate.
Medicare tax goes towards Hospital Insurance or HI. Employers are required to pay 1.45 percent of the Medicare tax for their employees. If you are self-employed, the rate is 2.9 percent. Medicare is a federally funded program that provides medical coverage to older Americans.
Some argue that social security will be used up, but the Medicare benefit and unemployment funds also come in handy should you find yourself living to a ripe old age or laid off of your job. Each tax serves a purpose that benefits us and other taxpayers.
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