A Guide To Understanding Your 1st Paycheck (for the recent and seasoned grad)
Getting your first paycheck can be a really exciting time! It can also be a really confusing time. If you received a paper check for your first pay day, you may be thrown off by all the abbreviations and deductions. If you received your pay via direct deposit, you’re probably seeing less money that you expected. Your pay stub is packed with important financial and tax information you may not know how to interpret but don’t panic! We’ve got you covered.
This is especially important for hourly employees. The pay period is the number of days for which a regular, hourly employee gets paid. Salaried employees will receive the same pay irregardless of hours and days worked. Pay periods vary by employers but will likely be weekly, bi-weekly, monthly or twice per month on specific days (i.e. the 1st and 15th). Make sure that all your hours and days are accounted for in this period.
Gross Wages vs. Net Pay
This is the part that breaks many hearts. Gross wages is that number you look at on every paycheck and think, “Wow, I never even got to see you.” Your gross wages are your pre-deduction compensation. For example, if you make $18.00 per hour and work a standard 40 hour work week, then your weekly gross wages are $720.00. Chances are Uncle Sam takes about 20 percent of that and with your other deductions, you’re probably left with about $575-495 as your net pay or take-home pay. Depressing isn’t it?
Federal Income Tax
Yes, the federal government always gets a piece of the pie. There’s no way around this, so the first step is acceptance. How much money is withheld for federal tax varies. It depends on how much you earn and how you filled out your W-4 (Employee’s Withholding Allowance Certificate). Depending on your family size, if your married or single, you may claim allowances for yourself, spouse and dependents. Every allowance taken results in less money being withheld for federal taxes (more money on your check). Take fewer allowances and a larger amount will be taken for your federal taxes. As always, you have a chance of getting that money back when you do your taxes at the beginning of the year.
You may or may not have to pay state income tax, depending on the state in which you reside. There are seven states with no income tax and two that only tax dividend and interest income. If you reside in one of these states, count yourself lucky.
You will be required, along with every working American, to contribute to Medicare. Medicare is an insurance plan that provides medical benefits to citizens age 65 and older and for people under that age with certain disabilities. You will be putting in 1.5 percent of your gross wages from each check.
If you chose an insurance plan (medical, dental, or life) through your employer, monthly premiums for these will be deducted directly from your pay. Ensure that you understand the cost of each and how they will be deducted before signing.
If you’re smart and already started your retirement savings plan, such as a 401(k) (learn more here), then you’ll have this deducted from your gross pay as well. Typically, when signing up for your 401(k), you select a percentage your of your pre-tax income or a set amount to contribute to your retirement account. The amount chosen, will be deducted from each check and deposited into your savings account.
The government requires that working citizens contribute 6.2 percent of their gross income into the Social Security fund. The Social Security fund is a supplemental retirement program that provides benefits to Social Security recipients.
That all probably sounded daunting but don’t worry, there are ways to manage your income (after deductions) and still live comfortably. Need help managing your money and figuring out how to make your take-home pay work for you? Set up a Discovery Call today!