Pay As You Earn - PAYE

We’re thinking of four letters to describe the income and Social Security taxes our employer takes out of our paycheck every two weeks. No, not those four letters, but we hear you. The letters we were thinking of are PAYE, which stands for “pay as you earn.” In the tax world, PAYE refers to those employer-withheld taxes. If we have too much withheld, we’ll get the overage back when we file our taxes. If we don’t have enough withheld, we might end up owing a little bit come April 15th.

If any students out there are thinking, “That’s not what PAYE means,” they’re sort of right: in the world of student loans, PAYE still stands for “pay as you earn,” but what that actually means is a little different. A PAYE plan is a student loan repayment plan that bases our monthly payments on our income instead of having a fixed payment. So while we’re slaving away at our $38,000 entry-level job, our loan payments are a lot lower than they will be when we take over the company in five years and are making $380,000.