Saturday, September 7, 2013

Pay's Anatomy or "Who the f**k is FICA?"

Happy Satur-dee!! Reachin' out!!

If today is Saturday that means yesterday was Friday. Also it's the first week of the month. What I'm getting at is that, in one way or another, many of us got a paycheck this week. For wage workers like myself it's the accumulation of our hourly toils manifested in monetary form. For you salaried folk it's a 1/24 size slice of your annual currency cake.

I want you all to take a little trip in your mind back to when you had your first real paying job. Mine was at Six Flags back in 10th grade. I remember being so excited to get my first paycheck. I remember ripping up the perforated envelope like it was a Christmas present. What I saw was a large dollar amount at the top (at least it seemed large since I'd never really had money before), a bunch of abbreviations, acronyms and minuses in the middle. At the end of this page long algebra equation was a significantly smaller dollar amount at the bottom. Of course the smaller amount is the one I got to take home. Soc Sec. FICA. Withholding. Medicare. OSADI. Who are these people and what gives them the audacity to take my money before I even get my check?

As the years have gone by and the jobs changed that equation had only gotten longer and more complex. More and more people seem to have their hands in my wallet. I recall another memory, this time in 9th grade citizenship/economics where we learned how to properly fill out a check. Ten years after graduating I am realizing that we were to taught how to pay but were never taught how we're paid.

Let's take a moment to dissect this little parchment of purchasing power. This is the anatomy of a paycheck.

EARNINGS- Working wages accumulated before any deductions are taken.

This is also listed as gross pay. This is the amount you earn for doing your job. If you're an hourly employee your hourly rate of pay should be listed. Subsequent pay rates will also be listed here for commission, holiday pay, vacation/sick leave pay, bonuses and overtime. For salaried workers this is a predetermined amount equally divided up over a year and paid in regular disbursements.

DEDUCTIONS- Amounts automatically subtracted from your pay

There are three classes of payroll deductions:

Pre-tax: This will include insurance benefits ( medical, dental, vision) and tax-deferred qualified retirement contributions (traditional IRA/401k). These are taken out of your gross pay.

Taxes: This is where all those "fun people" are. Depending on the type of work you do there may be a lot of different versions of Uncle Sam taking his cut of your hard earned labor. I'll highlight a few of the most common:

  • Social Security, sometimes abbreviated as "Soc Sec". It could also be listed by its formal name; Old-age, Survivors and Disability Insurance (OSADI). What is essentially happening here is that both you and your employer are paying onto a trust fund. As the name implies you will receive this as a payout once you reach old age (67) or if a disability renders you unable to work. Your beneficiaries (survivors) will get this money should you die before retirement. The Federal Insurance Contributions Act (FICA) is the federal mandate that allows this contribution as well as contributions into unemployment, Medicare and soon Obamacare. I plan to post more in-depth about Social Security at a later date.

  • Federal and State Income Tax Simplest explanation is that we pay taxes on our income to make the government run. Not all states have income tax. We'll talk about this later as well. 
All of these deductions add up to give you your total withholding, the amount you give up to the government this pay period. We often end up overpaying resulting in getting a refund when we file our returns.

After Tax: These are further deductions that don't qualify for pre-tax withholding. Here you will have your voluntary benefits provided through your employer (i.e. car insurance) and tax-advantaged qualified retirement contributions (Roth IRA/401k).

NET PAY-Otherwise known as your take home pay after all deductions have been taken.

I know this is long but I have barely scratched the surface of all of the subtopics here. If there's anything you want me to touch on specifically please feel free to leave a comment.

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