Summer is a great time for family vacations and amusement parks. If you are one of the lucky 20 million young adults’ ages 16-24 years old working is also on the schedule. The Bureau of Labor and Statistics estimates annually 20.3 million young adults become employed between the months of April and July. School may be out but you will still be learning about life as a working adult. Earning your own money brings its own kind of personal freedom. A summer job is the perfect introduction to money management. One topic normally skipped over is the actual taxes taken from you.
When you receive your first paycheck stub you should notice your gross pay and a few deductions before you get your actual net pay. Gross Pay is the total amount of income earned before any deductions are taken out. The first thought going through your mind might be how do I keep all of my hard earned money? Your first lesson as a working adult is you don’t get to keep all of your hard earned money. All businesses are tax collectors for the government. The first day you became an employee you were signed up for the government’s special pay as you go tax package.
There are normally four separate taxes being deducted from your gross earnings. Federal income tax withholding is the first tax to be deducted from your paycheck. This tax is a percentage on the gross amount of money you are earning. The tax percentage for 2015 was 10% on earnings from $1-$9,225. To make it easier for you the IRS actually lists a tax table every year that tells you the amount of income tax you should have paid based on your gross income. This tax is how the government pays for public services.
The second and third deduction you should see is the FICA deduction. FICA stands for the federal insurance contribution act. This tax is actually comprised of two individual taxes that are required by law to be deducted from your earnings. Social Security tax of 6.2% is the second followed by the Medicare tax of 1.45%. The taxes collected under FICA are used to pay for retirement, survivors benefits, and qualified disabled individuals. Medicare is used to pay for medical insurance.
The fourth tax is the state income tax deduction. Depending on your home state you might even have additional locality taxes. States like Alaska, Texas, Florida, Tennessee, Wyoming, Washington, Nevada, South Dakota, and New Hampshire do not have income taxes. When file a tax returns the federal income tax and state income tax over payments are what you would have refunded back. The next time you look at your paycheck the deductions should all make sense.