Your Paycheck – Tying it all Together

This will be my last post in the Mini Series “Your Paycheck” it will be a large example incorporating all aspects of the previous posts in this series, Gross Income vs. Net Income, Taxable Income, Federal Allowances, Federal Income Tax Withholding, State Income Tax Withholding, Before Tax Deductions, and After Tax Deductions, Enjoy!

One quick note before I start: the goal of this post is to give you a template for calculating your own net income. You may have more or less of the pre-tax deductions, allowances, etc than stated in the example below. Following this methodology and substituting your information should yield correct results and give you a detailed understanding of how your paycheck goes from gross to net income.

Jackie is married and lives in the state of Illinois, her husband currently does not work; therefore his gross income is $0, for tax purposes they plan to file jointly. Jackie’s gross income is $65,000/year, she claims two federal allowances, makes an annual contribution of $2,600 (4%) to her 401(k), has a total benefits cost of $900/year (health, vision, dental, etc), and has no post tax deductions. What is Jackie’s take home pay?

Our 1st step is to determine Jackie’s taxable income

We first need to subtract her pre-tax deductions (401(k) contribution and benefits cost) from her gross income.

Total income after pre-tax deductions is $61,500, but the example also states she claims two federal allowances, in 2011 each federal allowance claimed lowers taxable income by $3,700. We must adjust taxable income for those two allowances as seen below.

Jackie’s total taxable income is $54,100 this is the number we will use to compute federal tax withholding, reference the federal tax withholding table below. We will also use $54,100 to calculate state income tax withholding.

Since Jackie is filing jointly we will use the second column of the above withholding table. See a breakout of the calculation below. (If you need more detail on how to use this table please reference the post on Federal Income Tax Withholding).

Total Federal Withholding is $6,080, but we can’t forget to compute social security and medicare tax as well, which if you remember are based upon gross income, not taxable income.

Now that taxes on the federal level have been computed we need to figure out state income tax withholding. Illinois has a flat state income tax rate of 5% so calculating withholding is pretty straight forward, taxable income x 5%.

Jackie has no post-tax deductions, so we are now ready to add all of the components above together and compute net income.

*Semi monthly values are simply the annual amount divided by 24.

There we have it! Jackie’s net income is roughly $49,000 per year. That is drastically different from her gross income of $65,000; $16,000 lower drastic! Granted she does keep the amount contributed to her 401(K)…but this large gap emphasizes the importance of knowing what happens to your money before it hits your pocket-book. Armed with this knowledge you can better pre-pare for taxes, retirement, health benefits, and monthly budgeting.

Here is a link to the tax calculator which will yield the same results as above using the sample data. Use it with your information as a double-check to your own calculations, or to take a quick look at your paycheck without having to perform all the calculations above. (Tip, “457 plan withholding” is where you input retirement plan withholding)

Hopefully you’ve enjoyed this mini series and you learned something new and informative.

Your Paycheck – Federal Income Tax Withholding

Why this topic should interest you?

This is your money and the government takes a piece before it even hits your pocket! Just because we must pay taxes by law doesn’t mean we should ignore them all together and hope for a refund when we file each year. Understanding the basic principles of federal tax withholding can prevent you from owing money to the government during tax season and could even boost your monthly net income.

Federal income tax withholding is the portion of income the federal government withholds from your paycheck. It is based upon taxable income, which is usually gross income adjusted for any tax deductions, like contributing to a retirement plan. There are three types of federal taxes withheld, the main federal withholding, social security, and medicare. All of them may or may not show up on your paycheck, depending on your status such as student, senior citizen etc.

Federal Withholding – This is the big boy, the main tax used to fund the federal government. It is based upon your taxable income and your filing status, single, married, etc. It is also a graduated scale, meaning the more you make the more you pay. Below is the 2011 IRS Tax Withholding Table.

Here is an example of how to use the table. Say you are a bachelor two years out of college with a gross income of $52,000/year and a taxable income of $47,000/year. Over the course of 2011 you should expect big Sam to withhold $7,350 in federal income tax. How did I arrive to this value? Remember, because of the graduated scale you can’t use just one tax rate, for our bachelor with a taxable income of $47,000/year we actually have to use the 1st three brackets of the first column (single filers) to calculate his total withholding. The first $2,100 of income is not taxed, the next $8,500 is taxed at 10%, the subsequent $26,000 at 15%, and the remaining $10,400 at 25%, this is done until the point where the next bracket can not be reached. The calculation for our example is shown below:

Federal MED/EE – This is Medicare tax, the current rate for 2011 is 1.45% of gross income, which your employer matches. With our above example our bachelor would have $754.00 ($52,000 x 1.45%) withheld and his employer would pay an additional $754.00. This is the same for everyone regardless of marital status.

Federal OASDI/EE – This is Social Security tax, the current individual rate is 4.2% of gross income, and your employer must pay an additional 6.2%. Using the example above the bachelor would have $2,184.00 ($52,000 x 4.2%) withheld and his employer would pay an additional $3,224. This is the same for everyone regardless of marital status.

A quick recap for our bachelor:

Over the course of 2011 a total of $10,288.00 will be withheld from his paycheck for federal taxes alone, that’s no small amount!

Some important notes:

Tax law can change frequently, the percentages shown here are for 2011 only, however the logic behind the calculations tends to remain consistent, a quick Google search should provide the latest tax rates.

Many other factors can influence the total amount of taxes withheld in a given year, such as any federal allowances and other types of deductions, etc. These items can reduce your taxable income and lower your withholding.

Taxes withheld from your paycheck do not necessarily equate with taxes paid. If you usually get a refund this is because more tax was withheld during the year than what you owed and vice versa, if you owed money not enough tax was withheld. You can change the amount withheld from your paycheck by modifying the number of allowances claimed on IRS form W4. To amend this form, contact your employer. For more information please see post on Federal Allowances.

I am not a tax accountant; this post is only meant to be a quick informative overview of federal income taxes covering the basics. For detailed questions or concerns please consult a tax professional.

For more information on federal income tax please reference

Link to a simple payroll withholding calculator