Money I Make vs. Money I Take Home: Understanding Paycheck Deductions

Posted by CapWay in Personal FinanceAugust 11, 2020(Last Updated August 12, 2020)2 min read
Are you ready to make some real money moves?

Have you looked at your paycheck and asked yourself, “Where are all these tax deductions going?” Great question and we are here to give you answers!

Below is a breakdown of the standard deductions you will see on your paystub.

Money You Make

Base pay is the amount you get paid for your job, but it excludes overtime hours or bonuses.

Gross income (also known as gross pay) is the amount of money you have earned before taxes are deducted from your paycheck.

Net income (also known as net pay and take-home pay) is the amount of money you keep after taxes are taken out of your paycheck.

Deductions From Your Paycheck

Federal income taxes are what the federal government deducts from your paycheck. The federal government imposes this tax across the country. They deduct a percentage of your hard-earned dollars, which pay for federal programs like health insurance programs (i.e., Medicare), social security, military costs, benefits for federal retirees/war veterans, and more.

(Check out a breakdown of how your federal dollars are spent.)

Social security taxes are taken out of your paycheck and matched by your employer to save for your retirement. Taxes such as social security and medicare tax are a part of the Federal Insurance Contributions Act (FICA) tax. Generally, this means that your payroll taxes are collected from both your job (employer) and you (employee).

Income tax is what the state government imposes on its residents, although it is important to note that not all states have state-level income taxes. Also, note that income tax and federal income tax are not the same. Income taxes typically pay infrastructure (like building and roads), corrections, assistance to low-income families, state police, parks, and more.

Medicare is the United States national federal health insurance program. Employers are required to take Medicare taxes out of your paycheck to contribute to the national program.

If your employer offers a 401(k) retirement plan, and you decide to opt-in, then your employee 401(k) contributions will automatically be deducted from your paycheck each pay period.

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