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College 101

The Truth About Your Paycheck
Article Type: Quick and Dirty

What's In Your Paycheck?

FINALLY! You have a job, you have worked your two weeks, you are ready for that first paycheck, and you can feel your body quiver in anticipation (that may be the wallet you are sitting on). As you tear open that first envelope, your brain is casually deciding what you are going to buy first, your stomach sinks through the floor, through the Earth and somewhere far into China. That paycheck you've been longing for? It's a fraction of what you thought it would be and all of the cursing in the world isn't going to get that money back. The even worse news is that it's going to be this way for every paycheck for the rest of your life. Sorry pal, this is what working in the real world is like.

You ask, “Who the heck is FICA and FUTA and why are they stealing from me?”

While you might earn a sweet $10 an hour life-guarding this summer, the government will subtract Social Security, Medicare, federal and state income tax from every check you receive, leaving you with less in your pocket than you actually earned. We know, it's unfair. Disgustingly unfair in fact. But hey, those roads, police stations, fire trucks, public schools and libraries, clean water, government buildings and every other public service Americans take for granted aren't going to pay for themselves.

Here's a breakdown of what's in your paycheck and what the government will take out:

Hours, Rates, and Earnings

You know how much you make. You know how much you earn. You know how many hours you've worked. You should know the total amount that will be written in this section of your check.

True to its title, this section will tell you how much you earn, how many hours you've put in this pay period and what your actual earnings are before taxes and all that nastiness. This is called your gross pay which is ironic since it's actually the opposite of the grossly low amount you're actually taking home. Sometimes this section will also include your earnings to date (sometimes abbreviated as YTD). This will let you know how much you've cumulatively earned since accepting employment at that company.

The "Hours, Rate and Earnings" section of your check is the most straightforward part but there is a catch. Even though minimum wage is set at $7.25 per hour, the federal government allows employers to pay you $4.25 per hour for the first 90 days of employment if you're under age 20. Most employers don't do that, but it is legal.

You should be able to tell if the "Hours, Rate and Earnings" section of your check is correct just by looking at it. C'mon, it's the American way to keep a running tally of how much you'll get paid in your head. That's how we get through the week at all. If there's a mistake, notify your boss and the accounting department immediately.

Tax Deductions

Here's where it gets hairy. If you're just working during the summer, good for you. You probably won't have federal or state income taxes deducted out of your check. In fact, if you know that you won't be earning more than $5,700 per year, you can tell the government that you absolutely don't want any income taxes taken out by writing "exempt" on your W4 (That's this form. You have to fill one out before starting your job).

If you're working throughout the year, you'll probably earn more than $5,700. Also, good for you! Earning more than $5,700 per year means that you'll have more money in your pocket, but federal and state income taxes will automatically be deducted. (Spoiler: You may be able to get some of it back as a tax refund when April rolls around).

Federal and state taxes go to pay for all public services the government provides, ranging from welfare to recycling programs. If you like anything the government does, you can thank the people who pay taxes to fund it.

FICA

One day you'll be old as dirt and on that day, the government will rise from the ashes and help pay for your medical expenses (maybe). Thankfully/unfortunately you're not there yet. For now, you're on the other end of the stick, forking over a chunk of your paycheck to help current old people pay their medical expenses.

The portion that goes to the elderly is called FICA. Short for the Federal Insurance Contributions Act, FICA funds Social Security and Medicare programs that protect our elderly. What it means for you is that in 2011, 1.45% of your paycheck goes to Medicare and 4.2% will go to fund someone's Social Security. In 2012, you'll actually pay 6.2% for someone else's Social Security.

Unlike income taxes, you don't have a choice about paying FICA but you will have sweet vengeance when some future teen is losing part of their paycheck to pay for your wrinkly rear end (maybe, unlikely...). What goes around comes around.

Other Deductions

At this point we have to ask a favor—look ahead. Way ahead. Look ahead to the days when you're old and your kids have grown up and you're too tired to work. Look ahead to the days when all you'll want to do is, as Will Smith once put it, "Chillin’ out, maxin’ and relaxin’ all cool." When that day comes, you're going to want some money to blow on golfing or gardening or whatever your old person hobby will be. You're definitely not going to want to have a job.

If you're lucky enough to work for an employer who allows you to deduct a portion of your paycheck to start saving for that part of your life now, take it and never stop thanking them. If they'll match a portion of your retirement savings, that's even better.

Statistically, money put in a retirement fund doubles every 8 to 10 years, meaning that money you sock away for retirement now will actually count more than money you save later. Most employers don't provide retirement options for part-time employees, but if you happen to stumble upon one that does, take advantage of it.

Freelancers and Teen CEO's

Think you're smart by starting your own company? Well...you are. Nice work. The catch is that you'll have to play by a different set of tax rules. Self-employed teens won't have FICA or income taxes taken out of their paychecks, but they will have to pony up for both when April taxes are due.

The price of being your own boss is facing harsher tax regulations. When you land a traditional job through a company, Social Security and Medicare will be deducted from your paycheck, but it will be matched by your employer. If, for example, you make $200 a week as an admin assistant, you'll pay $12.40 each week to FICA and your boss will pay another $12.40 on your behalf.

If you are the boss you'll pay both portions. For 2011, being your own boss will cost you 13.3% of your paycheck. By 2012, that figure goes up to 15.3%. The good/bad news is that it will probably take a few years for your company to become profitable. If you earn under $5,700, you won't have to pay income tax, but if you earn more, it won't be automatically taken out of your paycheck. You'll simply get a big fat bill for it all next April. If you're working for yourself, put a portion of each revenue check in a savings account and hold it. Believe us, you're really going to need it this spring.

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