Understanding Your Paycheck
Once you receive your first paycheck you're going to notice something a bit peculiar ... there's money missing! Don't worry, there's nothing wrong with your paycheck. You've just had a reality check called 'taxes'. For many people, bringing home a small paycheck is normal and a part of being in the working world. If you have big plans like buying a car, you'll have to make smart decisions to make it happen. Fortunately it isn't always about how much money you make, but how well you manage it.
Determine your "take-home pay"
The first thing to do is determine your "take-home pay." Many workers are shocked when they see their first paycheck because it's a lot smaller than anticipated. Why? Your employer is required to deduct and withhold taxes and then remit them to the proper government agencies.
For example, if you work 10 hours a week and are paid the federal minimum wage of $5.85 an hour, you would earn $58.50 per week. This is called your Gross Pay. However, you don't get the entire $58.50. Here's a description of typical deductions:
- Federal Income Tax: These are "pay-as-you-go" taxes, meaning you only pay taxes as you earn money. Your employer will calculate the taxes withheld based on your W-4.
- FICA: This is the Federal Insurance Contributions Act (the proper name of Social Security). This is divided in 2 parts – 1. OASDI (Old Age, Survivor and Disability Insurance) and 2. Medicare (retirement health insurance)
Depending on where you live, you may also have these deductions:
- State Income Tax
- City Taxes
- State Disability Insurance (SDI)
Subtract these deductions from your paycheck and the total is your Net Pay (also called, take-home pay). Depending on the state you live in, as much as 10 percent of your pay goes to federal, state and local income taxes along with nearly 8% for FICA. In other words, your gross pay may be $242, but your take-home pay might be closer to $200.
Now that you have a better idea of your actual "take home pay," the next step is to develop a budget.
