What many of us accept as a fact of work can be surprisingly frustrating for young people just starting out. My children refer to this frustrating transition as “adulthood.” This is the expected transition from childhood to adulthood, which includes managing your financial life.
Once you start paying your own bills, starting with what you deducted from your paycheck, you’ll have a lot to learn. With this in mind, I’ve decided to dedicate a column to Financial Adulting 101 from time to time, focusing on the basics of money.
Three of my own experiences have shown me, so I keep the adult row as simple as possible Giving too much information at once can be distracting. For example, after explaining her FICA to my kids, I tried to talk to them about other sections of their payslips, but they said, “No more.”
So let’s start with an introduction to salary.
“It’s important to know where your money is going and why you’re paying it,” said Eric Bronnenkant, head of tax at Betterment, a digital investment advisory firm. “Most people just put all their taxes in one bucket.”
Your payslip has a section related to FICA, or the Federal Insurance Contributions Act, which funds Social Security and Medicare programs.
or These funds may be listed as separate payroll taxes. The first is Social Security’s Old Age, Survivors and Disability Insurance (OASDI), which benefits older people, disabled workers, and families with a deceased spouse or parent. The other is Medicare, which provides health care to Americans over the age of 65.
When you start a new job, you will be asked to complete a W-4 form. Also known as the IRS Employee tax withholding slipThis allows employers to withhold federal income tax from their paychecks. If the withholding tax is too low, usually government money If you file your tax return, you may have to pay a fine. If too much tax was withheld, you should generally get a refund.
In 2020, the W-4 was updated to Simplify forms to reflect tax law changes under the 2017 Tax Cuts and Jobs Act. The form has five steps, starting with entering personal information and submission status, and ending with signing the form. Steps 2 through 4 must be completed if you have multiple jobs, plan to claim dependent tax credits, or have other additional income adjustments.
The breakdown of taxes to be withheld is as follows:
OASDI: Federal Old Age, Survivor and Disability Insurance Program, also known as the Social Security Tax. It costs him 6.2% of his first $160,200 wage in 2023. Therefore, an individual who earns that much this year will donate her $9,932.40 to her OASDI. The person’s employer contributes the same amount. If you’re self-employed, you’ll pay the full OASDI tax rate of 12.4%, but half of what you pay will be deducted, according to IRS spokesman Eric Smith.
Medicare: this is A tax of 0.9% applies to some high earners in addition to 1.45% of taxable wages. Unlike the OASDI tax, there is no limit on the amount of income subject to the Medicare tax. Self-employed people are also responsible for paying full Medicare taxes, half of which is also deductible. Medicare is also available for people under the age of 65 who are disabled and have end-stage kidney disease.
Federal Withholding: The amount of withholding income tax paid to the federal government. This is based on your income and the information you provided to your employer on your W-4.
State withholding: State and/or local taxes deducted from your salary. Some states, such as Florida, do not collect personal income tax.
Here are some payroll terms you should know.
Total income: Aggregate earned amount for the current payment period or YTD (Year to Date) before withholding or deductions.
Employer-paid benefits: Employer-paid benefits, such as matching contributions to retirement savings plans like a 401(k).
Pre-tax deduction: Money that is exempt from income tax, including medical or dental insurance, or money you choose to put into a flexible spending account or retirement plan at work. A pre-tax deduction reduces your taxable income and reduces the amount you owe the government.
After-tax deduction: Deductions not exempt from income tax and FICA. These include life insurance, long-term disability insurance, union dues, or charitable contributions that are deducted from your salary.
salary: Earnings that you can finally take home after all taxes and deductions.
I’ve heard that you may not have had enough time to claim your benefits, so you may be complaining about your Social Security payments.
This is a big financial problem. According to the latest report, the reserves of the Old Age Insurance and Survivors’ Insurance (OASI) Trust Fund, which pays retirement and survivors’ benefits, are expected to run short and not be able to pay in full by 2034. commissioned report For Social Security and Medicare Trust Funds. At that point, only 77% of the benefits will be paid.
At worst, benefits are cut or taxes are raised, but Social Security is too essential for too many Americans to be eliminated. In 2022, 55% of her seniors reported that Social Security was their main source of income. according to to Gallup.
When my nephew got his first paycheck decades ago, he complained about FICA and yelled, “I got robbed.”
“No, Tom,” I countered. “You have been taxed.”
Bronnenkant describes FICA as “a retirement program designed to reduce the risk of poverty in old age.”
You may not like FICA, but the older you will appreciate the income.
