What many of us have accepted as the reality of work is shockingly frustrating for young people who are just starting out. My kids refer to this uncomfortable transition as “adulthood,” the period when the transition from childhood to adulthood, which involves taking control of your financial life, is expected.
There is a lot to learn when you start paying your own bills, starting with what was taken from your paycheck. With this in mind, I’ve decided to dedicate my occasional column to Financial Adulting 101, focusing on the basics of money.
I’m going to keep the adult columns as simple as possible because experience with my own three has shown me Conveying too much information at once can lead them to self-control. After explaining FICA to my kids, for example, I tried talking about other sections of their pay stub, and they’d say, “I’m out.”
So, let’s start with our introductory salary guide.
““It’s important to know where your money is going and why you’re paying it,” said Eric Brunikant, head of tax at digital investment advisory firm Betterment. “Most people kind of lump all taxes into one bucket.”
On your payment receipt, you’ll find a section related to FICA, or the Federal Insurance Contributions Act, which funds Social Security and Medicare programs.
or These funds may be included as separate payroll taxes. One is Social Security’s Old Age, Survivors, and Disability Insurance (OASDI), which benefits seniors, workers with disabilities, and families where a spouse or parent dies. The other is for Medicare, which provides health care to Americans 65 and older.
When starting a new job, you are required to fill out a W-4 form, Also known as IRS’s Employee withholding certificate, which allows your employer to withhold federal income tax from your paycheck. If too little is withheld, you will generally be in debt government money When you file your tax return and you may owe a penalty. If a large amount of taxes is withheld, you will generally have to get a refund.
In 2020, the W-4 has been updated to Simplify the form to reflect tax code changes under the Tax Cuts and Jobs Act of 2017. The form consists of five steps, beginning with entering your personal information and filing status and ending with your signature on the form. You must fill out Steps 2 through 4 if you have multiple jobs, plan to claim tax credits for dependents, or have other adjustments for additional income.
Here is a breakdown of the taxes withheld:
OASDI: The federal old-age, disaster survival, and disability insurance program, otherwise known as the Social Security tax. It will take 6.2 percent of the first $160,200 of your 2023 salary. So an individual earning that much income this year would contribute $9,932.40 to OASDI. The person’s employer will contribute the same amount. If you’re self-employed, you pay the full OASDI tax rate of 12.4 percent, though you also take a deduction for half of what you pay, according to IRS spokesman Eric Smith.
Medicare: This represents 1.45 percent of your taxable salary, with an additional tax of 0.9 percent applicable to some higher earners. Unlike the OASDI tax, there is no limit to the amount of income subject to Medicare taxes. The self-employed are also responsible for paying the full Medicare tax, half of which is also deductible. Medicare is also available to some people under 65 who have disabilities or end-stage renal disease.
Federal blocking: The amount of income tax withheld goes to the federal government. It depends on how much you earn and the information you provide to your employer on your W-4.
Country blocking: Any state and/or local taxes withheld from your paycheck. Some states, such as Florida, do not collect personal income taxes.
Here are some salary terms that you should know.
grand total: The running tally of what you’ve earned for the current pay period or YTD (YTD) before any deductions or deductions.
Benefits paid by the employer: Employer-paid benefits, such as matching contributions to a retirement savings plan such as a 401(k).
Pre-tax deductions: Any money that is exempt from income taxes, including medical or dental insurance, or money you choose to put into a flexible spending account or workplace retirement plan. Pre-tax deductions reduce your taxable income and, therefore, the amount of money owed to the government.
Discounts after tax: Non-exempt deductions from income taxes and FICA. These include life insurance, long-term disability insurance, union dues or charitable contributions taken from your paycheck.
net pay: The profits you get at the end after all taxes and deductions.
You may complain about paying into Social Security because you’ve heard it may not be around long enough to claim benefits.
This is a big financial problem. The reserves of the Old Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, are expected to be in short supply and will not be able to pay full benefits in 2034, according to the most recent report. Guardian report For Social Security and Medicare trust funds. At this point, only 77 percent of benefits will be paid.
Worse, benefits are cut or taxes are raised, but Social Security is too vital to many Americans to abolish. In 2022, 55 percent of seniors reported that Social Security was their main source of income, according to Gallup.
When my nephew got his first paycheck in decades, he complained about FICA, exclaiming, “I’ve been robbed.”
“No, Tom,” I replied. “You’ve been taxed.”
Brunenkant describes FICA as “a retirement program designed to reduce the risk of poverty in old age.”
You may not like FICA, but your older self will appreciate the income.