Consumers : Deciphering Fine Print of Paychecks
Employees just getting their first paychecks of 1989 would be wise to take a good look at their pay stubs. You may be amazed at what you’ll find out about your finances.
Deciphering most pay stubs is not easy, but if you can wade through the figures, you can get a handle on your budget for the year, see what your financial future looks like based on what you’re earning in 1989, or learn what you might save in taxes by joining a 401K plan if your company offers one.
Take the hypothetical case of Mary Smith, who is single, has no dependents and earns $40,000 a year.
Assuming her company pays her every two weeks, Smith will have gross earnings of $1,538.46 each pay period, but that’s not what she’ll take home.
If Smith’s company has a 401K plan, she would be wise to contribute as much as she can of her salary--most firms set a maximum of 6% that employees can contribute, to which in most cases the company adds a contribution of its own. The beauty of such plans is that contributions to 401Ks are taken out before federal and state income taxes are figured on your income. Thus they should be listed on most paycheck stubs as before-tax or pretax savings. So the larger the percentage you contribute, the more you can reduce your taxable income.
In Smith’s case, if she contributes 6% to the 401K plan, or $92.31 a paycheck, she can reduce her taxable income per paycheck to $1,446.15. Based on that reduction, Smith’s biweekly taxes will be:
* FICA (that’s the amount the federal government takes out of your paycheck for Social Security) of $115.54 for a total of $3,004.04 for the year. Since Smith makes below $48,000, her Social Security deduction will not increase in 1989 over what it was in 1988. But those who make $48,000 or more in 1989 will pay a maximum of $3,604.80. That’s an increase of $225.30 over last year’s Social Security deduction for the same salary.
* Federal Income Tax takes another big bite at $300.33 per paycheck or $7,808.58 a year.
* California takes $80.27 or $2,087.02 a year for State Income Tax.
* State Disability Insurance--the amount the state withholds to pay workers for all non-work-related disabilities or injuries--is $13.85 of Smith’s biweekly paycheck or $360.10 a year. Interestingly this year, SDI deductions have decreased from 1.2% to .9% of the first $21,900 of earnings, or a maximum of $197.10 for the year. The state often adjusts this percentage, up or down, depending on the number of disability claims in the previous year.
Added to those automatic tax withholdings will be any number of other deductions for employees, among them health and life insurance, long-term disability, contributions to charities, or any loan payments or savings contribution to the company credit union.
In checking their 1989 deductions, most employees will find more money taken out of each check for company-sponsored health insurance. Most health insurance premiums increased dramatically last year and many firms are upping the ante that each employee must chip in to cover health and/or dental plans.
For example, if Smith paid $3.50 last year to get health insurance from the company, she might pay $4.62 per paycheck this year. If hers is a fairly standard paycheck stub, other deductions might be $4.02 for life insurance, $14.80 for long-term disability, $7.21 to United Way (based on a standard of one-half of 1% of her earnings) and $10 to the credit union.
Based on those figures, Smith’s total deductions would be $642.95 per paycheck, giving her a take-home pay of $895.51 for each of the 26 pay periods. That translates to $23,283.26 a year that Smith has left over to pay the rest of the bills.
A Possible Catch
She could reduce her 401K contribution to 3%, which would decrease her before-tax deduction for the plan from $92.31 to $46.15 each paycheck. But, if she does that, her basic taxable income will increase and, along with it, biweekly deductions for FICA, FIT, SIT and SDI. The net difference to her paycheck would be only $29, and Smith would be better off contributing more to the before-tax savings plan and making do without the extra $29.
Employees also can add a few dollars to their weekly or biweekly pay by increasing the number of exemptions that they claim, which will reduce the amount of withholding for both federal and state income tax. But that can be a Catch-22 if they get too aggressive, according to Phil Kavesh, tax attorney and financial planner from the firm of Kavesh & Gau in Torrance.
The federal government, Kavesh said, permits employees to claim up to 14 exemptions without having to file a W-4 form with their employers, which will then be sent to the Internal Revenue Service.
“Claiming 14 or more, you have to file the W-4 with your company, which in turn sends that to the IRS,” Kavesh explained. “They don’t want people filing willy-nilly 99 dependents.”
The Tricky Part
But this is where the number of exemptions you claim gets tricky. Unless you’re a mathematical wizard, you’ll probably need a financial adviser to figure out the proper number.
“You have to be sure the total amount withheld (for 1989) is equal to at least the taxes paid in the prior year, or equal to 90% of the tax you will owe for this year,” Kavesh said. “If it’s been under-withheld, you’ll have more money in your paycheck, but you may have to make a huge payment in April. And they may add a penalty to it, so you might have to come up with some big money on April 15.
“What if they say you owe another $5,000 in taxes and you’ve already spent it?” he continued. “That’s the biggest problem in taking too many exemptions. People also should be advised that if they claim more than 14 and file a W-4, they may risk the possibility of a tax audit.
“That’s why I recommend most people be a little over-withheld,” Kavesh added. “If they get a little more with each paycheck, they’ll probably spend it and not know where it went. If you’re overwithheld, it’s like a forced savings. And you’ll get a lump sum back that you can do something with.”