WPMG Consulting

Solving Workforce problems since 1989

Taxes, Taxes, Taxes

Sep 18, 2012 | 1 comment

by Melvin Collins, Jr

Have you ever received your paycheck at the end of a grueling work period and you take a peek at your earnings and you just want to ask, “Who is this guy FICA and why is he taking my money?”

We are going to take a look at a typical paycheck and go over each section to see where our money is going every payday. Many people have been receiving paychecks all of their adult life, but, you would be amazed at how many people don’t even pay attention to their pay stub. Sometimes, they don’t even keep their pay stub. Do you? Well, you should (for income tax purposes).

A paycheck consists of two parts: the paycheck part and the paycheck stub part. The paycheck part, of course, as you know, is what you take to the bank and deposit into your account to use for your daily living expenses. The paycheck stub part will include a breakdown of your earnings and deductions for a pay period to illustrate how your employer has arrived at your net pay. It will have a list of everything you earned and everything they are taking out of your paycheck. It will also contain your personal information such as: your name, your address, your Social Security Number, your sick leave, vacation time, and perhaps even your date of birth, as well as your gross pay, your net pay and your deductions.

Let’s take those one at a time, okay? Aside from the personal information, oh by the way, with a word about your personal information, make sure that it is CORRECT. That’s right, sometimes the Payroll Department may have misinformation on you, particularly and most important your Social Security Number. Also make sure they have your correct contact information — mailing address, telephone number, etc. Now, back to Gross Pay. Here we go…

Your Gross Pay — Your gross pay is the total amount of money that you earned during a certain pay period, be it weekly, hourly, monthly or semi-monthly.

Net Pay — Your net pay is the amount of money that is left after all your deductions have been taken out of your paycheck.

Deductions — The deductions contain a whole other slew of information. It is a breakdown of everything that you pay for out of your paycheck. This will include regular and required taxes, medical benefits or your portion of medical benefits, retirement funds, savings funds, charitable contributions, etc. Let’s take a closer look at the breakdown of these deductions.

>Federal Withholding Tax: This is the amount of money that is calculated by law as your share of taxes paid. This amount will depend on the information you submitted on your W-4 when you were hired such as marital status and number of dependents as well as any other instruction you have given with regard to additional withholding amounts PLUS the amount of money that you earned.

>State Withholding Tax: This tax is an amount that is calculated depending on, your what? yes, that’s right — your gross pay. This amount is deducted from your paycheck to assist in funding governmental agencies within the state. We, here in Texas, do not pay state taxes because Texas is a tax-free state along with Florida, Alaska, Nevada, Washington, South Dakota, Wyoming, Tennessee and New Hampshire. Beware of this state tax if you are an individual who lives in a tax state and work in a tax-free state because even though your employer does not deduct state taxes from your paycheck because you work in Texas, your tax home state is still going to be looking at you to pay your state taxes (if you live in any state other than the few mentioned above).

>FICA: Here is the guy you don’t know and you want to know why he is taking all your money. Well, we are getting ready to find out. FICA stands for Federal Insurance Contribution Act. This tax includes two separate taxes — Social Security and Medicare. These two items may be combined on your paycheck as one deduction; however, in most instances, it is itemized separately. Let’s look at them separately.

~Social Security: This is considered the nation’s retirement program. This tax is taken from your paycheck every pay period to assist in providing retirement income for the elderly and it pays disability benefits to those in need. These taxes are calculated at a percentage rate. In 2011, this percentage was lowered from 6.2 percent to 4.2 percent. The annual wage limit remains at $16,800 of your salary for the year. Once that amount is earned, the employer will stop the withholding tax and will resume it when the new year begins.

~Medicare: For Medicare, the withholding percentage deducted did not change. It remains at 1.45 percent. Medicare does not have an annual wage limit like Social Security. Therefore, the employer will withhold this percentage from all of your paychecks the entire year.

~Employer’s Share: If you think IRS is just taking your money out of your paycheck, don’t be fooled. Your employer is paying as well. Employers are required also to pay Social Security and Medicare on wages that they pay to you. Unlike the reduction in percentage that you enjoy, the employer’s share of this tax did not decrease. They are still required to pay 6.2 percent instead of the 4.2 that you pay. For the Medicare part, the employer pays the same percentage as you. So, the employer pays his portion of Social Security and Medicare taxes, plus he also pays your withholding, together, to the IRS. Of course, he takes it out of your paycheck but he does not keep it. He just funnels it through to the IRS.

~Considerations: This is something else that not a lot of people know about and it is called the IRS Section 125 Plan. This is for such things as a medical or dental plan that meets the IRS’ Section 125 criteria and this plan is not subject to Social Security and Medicare taxes. If you have such a plan, then, the employer will subtract the non-taxable benefit from your gross pay before he makes his taxing calculations. The amount after subtracting this benefit is called the employee’s taxable wages. Your employer will then figure your withholding, Social Security and Medicare from this new amount. This requires the employer to file a form with the Social Security Administration showing your taxable wages on your W-2 form for the year and he is required to provide a copy of that form for you to file with your tax return with the IRS.

>Retirement Plan: This is a plan that you set up with your employer if you want money deducted from your paycheck every pay period to help fund your future retirement benefits. This is an amount that is sometimes matched by the employer. This could be a 401K, a state or even a local retirement plan. Government employees belong to public pension plans funded by taxpayers. Private companies also provide pension plans, but their funds are based on investment planning (stocks and bonds). Due to the poor economy, many companies are opting out of pension plans. They are now directing employees into defined-contribution plans in which the worker, not the employer, bears the risk of poor investment performance.

>Medical and Dental Health Plans: This is a plan that you decide whether you want deductions taken out or not. However, the employer has to offer such plans for you to take advantage of this. Therefore, if they do offer one, you need to decide what type of plan you need and what is the best medical and dental coverage for you and your family. A carefully selected health and dental plan can potentially reduce medical costs over the long term and give you peace of mind. Now, keep in mind, that your employer may pay for your health and dental plans OR they may pay a portion of it OR they may pay nothing. In this last case, you would be totally responsible for the price of the package you choose.

>Year-to-Date: Lastly, on your deductions is the YTD wages. This is the total gross pay you have earned to date. Some employers will not only show your cumulative gross pay, but your cumulative net pay as well along with your taxes, your deductions, sick leave, vacation time, etc.

If you ever want to double check your paycheck amount, know that if you add up your net pay, your taxes and all your deductions, it should equal your gross pay for that pay period.

Now, if you don’t want to pay taxes at all, ever again, read the article on the next three pages. I wrote this a couple of years ago; tell me what you think with regard to this new concept. I am curious to see if people would really like to see something like this happen. I think it’s great. My family and friends like it, so, again, tell me what YOU think! I look forward to your comments.

Tax Structure