Congratulations on starting your new job! You're making a salary and moving forward financially. But when you get your first check, you find a list of items and several deductions. What does it all mean?
Income
Gross salary is the amount of money you were hired for, whether it is an hourly rate or salaried rate. If you are an hourly employee, to determine your gross salary, simply take your hourly amount and multiply it by the number of regular hours worked. For example, if your hourly rate is $25.00 and you work a 40-hour week, multiply $25 x 40. Your gross weekly earnings are $1,000; you would then multiply this by weeks worked to obtain your annual gross pay.
The gross earnings amount can be substantially higher than your net earnings, which is your gross salary minus all of the taxes and other deductions. In other words, your net earnings are the amount of money you actually take home.
The amount of overtime hours and the overtime rate may be the next entry on the income side of your paycheck. Overtime is generally time-and-a-half, but it can also be double-time or triple-time. Other sources of income can include bonuses, incentive bonuses, on-call base salary, etc.
A. Standard Deductions
There are several standard or base deductions that everyone who claims an income must pay. These are as follows:
Federal Income Tax – This is the tax that is charged to you based on your gross income minus any "pre-tax deductions," such as retirement plan contributions, e.g., 401(k), 403(b), or certain healthcare and childcare contributions, e.g., those that are part of a Flexible Spending Account (see below). Pre-tax deductions are those which lower your taxable income. So, for example, if an individual earns $50,000 in a year, but contributes $10,000 to a 401(k), then the individual is only taxed based on an income of $40,000. Federal Insurance Contributions Act (FICA) – FICA contributions fund Social Security (the national program to provide unemployment compensation, old age pension, welfare, etc.) and Medicare (the national health insurance program for individuals aged 65 years and older). The Social Security portion is 6.20% and the Medicare portion is 1.45%, totaling a combined tax rate of 7.65%. Currently (2008), there is a Social Security cap on earnings of $102,000, which means that the amount of tax goes down based on gross salary. State Taxes – These vary according to the state in which you work and live; some states do not have personal income tax.State Unemployment and Disability – Certain states require employees to contribute to this program. This i