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Jun 10, 2014

In a recent USA Today article, which you can read here, there was a discussion of the ways to increase your paycheck.  This article was written by Erika Rawes, a freelancer specializing in personal finance topics.  It’s always fun to read opinions from others on ways to increase a paycheck.  There are really only two options: Get a higher salary or decrease the deductions coming from your check.  Her article, while well written, missed the point in my opinion.  By the end of this post, you’ll have some practical tips that you can actually use to increase your paycheck.  Those outside the payroll and tax community sometimes don’t see the whole picture on how all of this fits together.

First, lets define “your paycheck.”  For our purposes, this simply means your take home pay.  You have a stated salary or gross pay listed on your paystub which is how much you earned working for your employer.  After all taxes and deductions have been removed, you are left with take home pay which is sometimes called “netpay.”  The intent here is to help you take the largest amount home from the amount you earned at your job.

The authors first point was “maximize allowances.”  While this is admirable, it is important for you to remember that allowances in the world of payroll relate to non-taxable money.  If you are single, renting an apartment, and have only one job, it would be crazy for you to claim the same number of allowances as someone who owns a home, donates to charity, pays lots of state tax and has multiple children.  The IRS withholding calculator is nearly like completing a tax return.  Translated, that means it’s hard to use.  A better tool is the W-4 Assistant at  It’s free.  To maximize allowances properly, you need to complete the worksheets on the W-4 and turn this in to your payroll representative.  By claiming the right number of allowances for your situation, you will slightly overpay your tax liability for the year leading to a small refund.  If you owe a lot, or get a large refund at tax time, you need to change your W-4 to maximize your paycheck

The second point in the article had to do with VTO (Volunteer Time Off).  While this is admirable, most employees don’t have access to something like this.  A more practical tip is the maximize your 401(k) contribution.  If your employer matches your contribution, you should be contribution at least enough to maximize that match.  For instance, if your employer matches 100% of your contributions up to 3% of your salary, then you should be contributing no less than 3% of your salary. This reduces your tax bill by deferring your salary to a later point in your life.  This also help establish the good habit of saving for retirement.  Employer matches help accelerate your contributions.  The tax savings becomes part of your contribution.

The last point was to evaluate your health insurance options and maybe reduce coverage.  Unless there is a life event, or your company is in its open enrollment period, you can’t make changes here anyway.  A better option is to join your company Health Savings Account (HSA) plan or a Flexible Spending Account (FSA) option.  Both of these allow you to pay for qualified medical expenses on a pre-tax basis.  That means you pay for prescriptions, copays, deductibles, dental work, etc. using un-taxed dollars.  Instead of paying high premiums for a health plan and then paying after tax dollars for non-covered items, a qualified HSA health plan would reduce the premium and allow you to use that savings to contribute to a savings account that never goes away. If you never use it, it could become an Individual Retirement Account later in life.  In addition to these savings plans, make sure you pay attention to who you are covering in your insurance plan.  If your coverage situation has changed, you don’t want to be paying to cover people who are not going to be using the coverage.

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