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Tax Facts: Who's Taking Money From Your Paycheck And Why

Remember that gut-wrenching feeling when you opened your first paycheck from your first big-girl job and saw just how much was already taken out before you had a chance to spend any of it? I do, too. #InsertFaintingSpellHere

Taxes, babe, get used to 'em.

To ease the sting of relinquishing your hard-earned cash, here is some insight into the government agencies that receive your funds and what that money is used to do.

Pull up a copy of your most recent pay stub on your employer's website and follow along.

If your employer doesn't make these available to you electronically, you can either request a copy or pull it from your file. If you don't have a file, make one, STAT!

Federal Withholding

This amount goes toward pre-paying your federal income tax, which will be due based on the total earnings you make this year.

The amount of federal withholding varies based on how much you make and what you state in terms of your dependents (or, those who rely on you financially).

You have some flexibility over how much is withheld here by adjusting your withholdings. You can either decrease the amount withheld (by claiming more exemptions) or increase the amount withheld (by decreasing your exemptions).

If you estimate you will make about the same amount as you did last year with the same tax deductions and you got a refund, I suggest you increase your exemptions to decrease the amount withheld.

The withholdings are a loan to the government for the taxes they estimate you will owe next April.

You don't want to give the government a free loan for nothing, so don't overpay and ensure you will get a refund. Decrease your withholdings so you can save those funds throughout the year (or, splurge on an extra latte every month).


Fed MED/EE

Med stands for Medicare, which is government-sponsored health insurance for workers and their spouses starting at age 65.

We have no control over this amount, unfortunately. Medicare claims 1.45 percent of our wages from both the employee and employer for a total of 2.9 percent of our earnings. If you are self-employed, you are required to pay all 2.9 percent. Bummer.


Fed OASDI/EE – OASDI

Old Age/Survivors/Disabled Income is the technical name for what we all know as Social Security. We don't have any control over this amount, either. We are required to pay 6.2 percent of our earnings from our employer into the Social Security “trust fund.”

If you are self-employed, you have to pay all 12.4 percent. #DontShootTheMessenger

Refresher: Social Security is a government program that provides payments to retirees, as well as widowed and disabled individuals.

When you hear financial analysts saying there won't be enough workers to make the payments to retirees in the future, this is what they are talking about.


CA Withholding (if you live in California)

You also have state withholding if your state has an income tax. This is an area you have some control over.

Follow the same steps outlined in the federal withholding section for adjusting your exemptions to ensure you get a small refund next spring (it's better for you long-term).


CA OASDI/EE

If your state offers disability insurance, it may be called something similar to this. In California, it is a disability insurance offered through the state that provides benefits if you become disabled. The amount on this line is not something we can change.

You may not be jumping for joy at the money this comes out of your paycheck, but as with anything, when it comes to your finances, being in the know is much better than being left in the dark.

Take time to familiarize yourself with your withholdings and adjust your exemptions as needed to best suit your financial needs.

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Kelly MacRae

Contributor

Kelly MacRae, CFP® is passionate about empowering young professionals to learn more about money & take control of their financial futures. Helping thousands become more financially savvy, one inbox at a time, at www.GetTheSense.com.
Kelly MacRae, CFP® is passionate about empowering young professionals to learn more about money & take control of their financial futures. Helping thousands become more financially savvy, one inbox at a time, at www.GetTheSense.com.

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