Where Did My Dough Go?

After you receive your paycheck and notice the amount of money deducted from your gross income, you may be asking “Where did my dough go?” You understand that the amount of your paycheck indicates your net income and not your gross income. But, you want to know exactly where the money that made up your gross income went. It didn’t disappear. It is not M.I.A. So, where did that money go? No worries - this information is outlined in detail on the paycheck stub.

Money is deducted from your gross income for payroll withholdings. There are two types of payroll withholdings: mandatory taxes and optional deductions.

MANDATORY TAXES: I am sure you know what taxes are by this point, but do you know why they are important? Taxes are used to provide you and others with public goods and services, such as paved roads, schools, libraries, police/fire departments, and much more! Therefore, when you see the amount of money deducted from your gross income to pay mandatory taxes, remember that even though you can’t take this money to the bank, it is still benefiting you indirectly.

Mandatory taxes withheld from your paycheck include:

• Federal Withholding Tax - To pay federal income taxes. The amount withheld depends on two factors: the amount of money you earn and the information you provide on your Form W-4.

• State Withholding Tax – To pay state income tax and help pay for government needs within the state you reside. The amount of money deducted depends on the amount of money you earn. Some states don’t have state income tax.

• Federal Insurance Contribution Act (FICA) tax has two separate deductions:

  • Social Security Tax – This tax helps fund Social Security which provides retirement income for the elderly and pays disability benefits. 6.2% of everyone’s paycheck is deducted for this tax.

  • Medicare Tax - Medicare is the nation’s health care program for the elderly and disabled. 1.45% of everyone’s paycheck is withheld for this tax.

OPTIONAL DEDUCTIONS: When you elect to have additional withholdings deducted from your paycheck. You may ask, “Why would I want even more money taken from my paycheck?” Often, employers will offer additional benefits to their employees, such as health insurance and retirement plans. It is very beneficial for employees to take advantage of these benefits.

1. Medical – If your employer offers medical benefits (such as health insurance), you may elect to take advantage of this benefit. In that case, an amount will be deducted from your paycheck to pay for your portion of the medical benefit.

2. Retirement Plans- If your employer offers an employer-sponsored retirement plan, you can determine the amount of money you would like stash away for your retirement. Many employers have a match program; they will match a certain percentage of what you are saving for retirement. This is free money for your retirement and it is highly recommended that you take advantage of this benefit if it is offered.

There are many other types of optional deductions, such as life insurance, disability insurance, and transfers to saving or investment accounts. These deductions will depend on the benefits offered by your employer and whether or not you choose to opt into those benefits.

In addition to payroll withholdings, a paycheck stub outlines other important information:

PERSONAL INFORMATION: Your paycheck stub will state your full name, address, and Social Security or employee identification number.

PAY PERIOD: Indicates the time period for which your pay is calculated. This varies between employers. You may get paid once a month, twice a month, every two weeks, or even every week.

GROSS INCOME AND NET INCOME: The amount of money earned before and after deductions.

When you get your paycheck, don’t wonder where your “dough” has gone. There are valid reasons for deductions that you are currently benefiting from or that you will benefit from in the future. Review your paycheck stub to understand where your “dough” is going.