Written by Valerie Connors Sunday, 30 April 2006 19:00
Illustration by Cheryl Gloss
The first type of tax is called FICA and is commonly referred to in aggregate as social security tax. The percentage is the same for everyone, regardless of your filing status. This tax is calculated as 7.65% of your taxable gross and is broken down into 2 parts. The first part is called OASDI, which stands for Old Age, Survivors, and Disability Insurance. This part of the tax is often referred to as social security. This tax is 6.2% of your taxable gross up to a limit of $90,000 of income per year in 2006. The limit increases from time to time, generally when I’m getting close to reaching it. The second part is called MHI, which stands for Medicare Hospital Insurance, and is equal to 1.45% of your taxable gross. This part of your social security tax has no taxable limit. These numbers may or may not be shown separately on your check stub. The taxable gross is your gross pay less any pre-tax deductions, which we will cover under voluntary deductions.
Federal Income Tax
State Income Tax
Some states also have a state income tax, which like federal income tax, is also based on your tax filing status. Other states opt to have a sales tax instead of an income tax, and some states have both. If you have a state income tax, the same rules apply for figuring out your filing status as you use to determine your federal filing status. If you have a state income tax, you will be asked to fill out a separate withholding form for your state. The person who prepares your tax return is a good resource for help in making this decision.
EMPLOYER PAYROLL TAXES
If it makes you feel any better, you’re not the only one who pays taxes on your income. Your employer pays a number of taxes that are also calculated on your taxable earnings, which are paid to the taxing authorities quarterly.
Your employer makes a matching contribution of 7.65% to the Social Security Administration based on your taxable earnings. The employer’s portion of FICA is broken into 2 parts that are calculated separately, the same as with the employee FICA, because the same limit applies to the OASDI portion of the tax.
FUTA stands for the Federal Unemployment Tax Act. Your employer pays federal unemployment tax on the first $7,000 of your earnings each year. The rate is the same 0.8% for all employers, as long as they stay up to date with their state unemployment taxes. Otherwise, the amount can be increased to as much as 6.2%. This tax is used to fund state workforce agencies and job service programs and also contributes half the cost of extended unemployment benefits.
SUTA OR SUI
SUTA is the state version of unemployment tax that your company pays up to the taxable limit of your income each year. The state unemployment rate is different for each employer based upon his or her experience rate. That means the fewer unemployment claims a company has, the lower its tax rate. This tax is also referred to as SUI, or state unemployment insurance, and is used to pay unemployment benefits.
City or Local Taxes
Some areas of the country also have city and/or local taxes imposed on employers based on the amount of their payroll.
Voluntary deductions fall into 2 categories: pre-tax deductions and after-tax deductions. The taxable status depends on the nature of the deduction.
These voluntary deductions are just what they sound like. They are not taken before your taxes are calculated, so they don’t reduce your taxable gross. An example of an after-tax deduction would be an amount taken from your net pay and deposited into your savings account, assuming you have a direct deposit arrangement. Other after-tax deductions could be for employee personal charges made to company accounts, repayment of draws, or amounts withheld from your paycheck to support United Way or other organizations.
Direct deposit is the process of transferring your paycheck directly into your bank account. Some employers may give you the option of splitting your net paycheck into 2 or more accounts, depending on how agreeable your accounting department is.
Here’s an example of what a real paycheck stub might look like (see sample check on page 70). Let’s see if it makes more sense now. This is a bi-weekly paycheck, which means 26 pay periods per year. Some companies prefer a semi-monthly pay cycle, which means a paycheck every half-month, so there would be 24 pay periods per year.
The next time you see bewildered-looking people standing in your office doorway with paycheck stubs in their hands, you’ll be able to sit them down and relieve their pain! You can solve the mystery.
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