A few days ago, I pulled up the tax detail on my paycheck to see how much I was paying to Uncle Sam. Since I don’t get paper checks anymore as it’s all electronic through my job, I tend to forget how much of my hard-earned money is going to the government.
I guess it had been a while since I looked at one of my paychecks because I nearly fell out of my chair staring at my screen. It was pretty disheartening to see the Federal Income Tax, FICA Tax and State Tax eat up a solid chunk of my earnings.
After I picked my chin up off the floor, I decided that I was going to become more educated on where my money is going each month. For my benefit and yours, here’s a breakdown:
FICA Tax
What is it? How is it spent?
FICA is a payroll tax that pays for:
- Social Security (OASDI): A program that is set up to financially support retired workers, widows or widowers and disabled workers.
- Medicare: A health insurance program for people who are 65 years or older or certain younger people with disabilities.
How much does it cost me?
As of this writing, the total FICA tax is 15.3% of the employee’s gross pay. That is split between the employer (7.65%) and employee (7.65%):
- Social Security (OASDI): 6.2% for the employee and 6.2% for the employer
- Medicare: 1.45% for the employee and 1.45% for the employer
Let’s say your paycheck is $10,000 (baller!). Here’s your FICA breakdown:
- Social Security (OASDI): $620 tax
- Medicare: $145 tax
Federal Income Tax
What is it? How is it spent?
This is an annual tax on your personal income imposed by the federal government. Outside of Medicare and Social Security, your federal income tax dollars are used on areas like defense spending, Medicaid and interest on government debt. With all of the news lately about the current administration’s plans for our tax dollars, it’s even more important to be “in the know” on where your money is going.
How much does it cost me?
Your federal income tax rate varies based on a multitude of factors including your income level, your deductions (like mortgage interest) and tax credits (like energy efficiency).
For a great way to find out how much income tax you’re going to incur and the amount of allowances you should have for this tax year, check out this IRS Withholding Calculator. Since my tax return was higher than expected this year, I used this calculator to adjust my allowances so I’m not letting the government borrow my money again!
State Tax
What is it? How is it spent?
Depending on your state, you will be charged a tax on your income … again. This is revenue for your state and can be spent on areas like education, health care, transportation, corrections facilities, low-income assistance and much more.
How much does it cost me?
Again, this all depends on your specific state. For example, my state of Michigan has a personal income tax rate of 4.25%. Bankrate.com has an interactive resource that shows income tax rates by state.
If you live in one of these states below, throw a party because you pay no state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Not Much I Can Do, Right?
It’s easy to throw your hands up in the air and say “Well, we’ll always have to pay taxes. What can ya do, right?!”
Here are three recommendations:
1. Take a look at your paycheck today. Soak in the numbers. It’ll help you become more informed about how much you’re contributing. It might also give you some clarity as to why there is a constant debate about our government being more fiscally responsible.
2. Hold your appointed government representatives accountable in properly spending the money we’re sending their way. If you don’t know who your representatives are, click here for the US House of Representatives and here for the US Senate. Contact them and let them know your opinion. It is their duty to represent you!
3. Reduce your tax burden by taking advantage of tax favored retirement plans like 401ks and IRAs and ensure you're taking advantage of all deductions (donations, mortgage, etc.) and credits available.
4 Comments
OMG!!!
So much information. I will share with my staff members and print out your information for them to educate themselves as well in this area.
Thank you!
Thanks Cielo! I’m glad to hear the information was helpful!
Now you’re speaking my language (taxes!). Great summary-it’s crazy to me how little people know about taxes, even though it’s one of their largest expenses.
I’m a huge proponent of breaking out your paycheck in your budget to keep these numbers visible (I put in gross pay, then itemize each deduction instead of just listing net pay).
Yes, I am definitely one of those folks that needs more information on my taxes, where they go and, most importantly, how to reduce them. I like your thought on breaking out you income taxes in your budget so you know what you’re paying. It is too easy to forget when it’s hidden in our electronic paychecks or even with our escrow payments.