You’ve just graduated college, and likely are furiously sending out resumes in hope of securing that first “adult” job. Some recent graduates (maybe even you) held jobs throughout school – whether it was to pay for books, tuition, or other necessities – while others have not. No matter your situation, you may not know all the details that go into your first career paycheck.
For example – what’s FICA? Is that a person, place, or thing? Is a W-4 a piece of paper you only fill out your first day of work? Is this stuff even real?Let’s begin with the W-4.
Known as the Employee’s Withholding Allowance Certificate in the payroll world (and the entire world, but payroll’s likely the only industry that regularly calls it this), this document is a critical piece of any job.
Your W-4 has a direct tie to your bank account, as it tells your employer what taxes to withhold from your paycheck. You fill this out during onboarding, and the most basic questions involve whether or not you’re married, or own a house. These and anything you choose to withhold is called an allowance, and they’re based on the following:
- How many withholding allowances are claimed. Some permissible withholding allowances include:
- One for you, unless you’re claimed as a dependent by someone else.
- One for your spouse (if you’re married) unless the he or she is working and claims the allowance on his or her W-4.
- One for each dependent.
- Whether you want any additional amount withheld (this could be to affect your tax return, or money set aside for a 401(k)).
- Whether you claim to be exempt from withholding.
Based on the above, it makes sense that you can change your W-4 to fit your life, right? If you get married during the year, have a child, buy a house, or start saving more for retirement, you’ll likely want these momentous occasions to be reflected in your paycheck.
So, let’s move on to your paycheck.
A general understanding of your pay stub is beyond helpful. Below are the most common terms you’ll find:
- Rate: The hourly rate you are paid.
- Hours: The number of hours you are being paid for work in this pay period.
- This Period: How much you were paid in this current pay period.
- Year-to-Date: How much you have earned this year.
- Gross Pay: The total amount you earned before any deductions/allowances (which, as we learned, are based on the W-4).
- Net Pay: The total amount you earned after deductions. This is the amount you go home with.
Other terms you’ll see on a pay stub (which are determined based on where you live) include federal, state, local, Social Security, and Medicare. These are all payroll taxes, and no can escape all of them. However, if you live in one of these nine states, you can avoid paying state income tax.
Here’s a breakdown of the aforementioned payroll taxes:
- Federal income tax withholding, based on your W-4, and the withholding tables in Publication 15 from the IRS.
- The Federal Insurance Contributions Act Tax (FICA), which includes Social Security and Medicare.
- Social Security – Employees and employers both pay 6.2%. If you’re self-employed, you must pay both, for a combined total of 12.4%.
- Medicare – Employees and employers both pay 1.45%. Again, if you’re self-employed, you’ll have to pay both the employee and employer tax.
- State income tax withholding – This changes based on where you live and work
- Local tax withholding – Also changes based on where you live and work. States like Ohio, Pennsylvania, and Kentucky all have intricate local taxes. Pennsylvania taxes all the way down to your school district.
Want to learn more or even model a paycheck yourself? Head over to our salary calculator or W-4 assistant and starting getting the answers to your more specific questions.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.