First paycheck trauma
When a young person gets their first job, the shock on their faces when they see the amount of tax withheld from their first paycheck is almost comical. They just cannot believe how much tax is withheld.
I was reminded of this the other day when I overheard a young woman complaining to her coworkers about her paycheck. Apparently, it was her first job and her first payday. She was incredulous about the amount of money taken out of her check for taxes. She didn’t even know what FICA was.
Payroll tax misconceptions
But over time, we seem to get accustomed to the big bite taxes take from our income.
Once, shortly after I had filed my tax return, I was venting to a coworker about how much federal income tax I paid. She stated that she didn’t pay any tax at all. Because she didn’t owe any additional taxes when she filed her income tax return, she mistakenly thought that she wasn’t paying any tax. I suggested that she look at her paystub. I pointed out the yearly federal income tax withheld, along with social security and Medicare. That’s the tax she actually paid.
What is take home pay?
Young people need to understand the impact of taxes on their take home pay. Not only that, but they should also know what take home pay means. Take home pay is the amount of pay they will receive after deductions and withholding. They can expect Federal taxes, like federal income tax, social security tax and Medicare tax to be withheld from their checks. For first time wage earners, the Hire Your Money® Course has a great sample paycheck tool. It demonstrates and explains the various taxes and deductions that might be withheld.
Real number tax scenarios
If you want a look at real numbers, try a free online federal tax calculator, like the one at smartasset.com. Consider these scenarios:
- A single person working 25 hours a week at $10 per hour, paid weekly earns a gross pay of $250. But they will receive a take home pay of $221. That’s a difference of $29 per paycheck. That’s more than $100 less per month. And yearly, that’s over $1500 paid in taxes.
- A single person working 40 hours per week at $40,000 per year, paid biweekly, earns a gross pay of $1538. After taxes, they will receive a take home pay of $1281. That’s a difference of $257 per paycheck. Monthly that’s over $500 less due to taxes. Yearly, you’ll only take home $33,306.
In the second scenario, a young person might be shocked to find that they will have $7000 less per year to live on.
By the way, if you’d like to learn more taxes, or other everyday money matters, consider the Hire Your Money® course. It is a cutting edge, cloud-based interactive course that empowers young people to take command of their money lives. You will be able to access the course on your favorite internet-enabled device. No reading required. Included are presentations about must-know money topics, videos, and downloadable money tools.