Itemized payroll deductions can inflict some major damage on your spending plans. Blame them, too, when that raise or promotion doesn’t increase your take-home pay as much as you anticipated. Federal and state laws mandate several deductions. You can control the amount withheld for one of them. You also have a say in the deductions you authorize for benefits, savings plans and donations.
Covering your tax obligations every pay period may not help your budget, but it keeps the tax man happy. Americans have had federal income taxes withheld from their paychecks since the Current Tax Payment Act was passed in 1943. States, too, require payroll deductions. Unless you live in one of the nine income-tax-free states, your employer withholds money from your salary for your state income tax obligation. According to the Tax Policy Center, 18 states allow local governments to tax income, which reduces take-home pay even more for their residents. Although the federal rate is the same regardless of where you live, state and local tax rates vary. Determining your after-tax income helps you evaluate how much more take-home pay you'll have from that new job or increased pay.
Payments to the government don’t end with income taxes, however. Your paycheck reflects itemized deductions for payroll taxes, too. The Federal Insurance Contributions Act, or FICA, established payroll withholding to fund Old Age Survivor Disability Insurance, or OASDI. "FICA-OASDI" on your pay stub represents this Social Security payment, which stood at 4.2 percent of your taxable income as of 2012.
Other Mandatory Deductions
FICA also mandates a second tax for Medicare. The Medicare tax finances health care for those 65 and older. In 2012, the itemized deduction for Medicare was 1.45 percent of your income. Depending on where you live, your pay stub may also itemize deductions for state unemployment insurance and disability payments. Employers must withhold court-ordered child support payments, regardless of your residency, to comply with the federal Child Support Enforcement program, established through Title IV-D of the Social Security Act.
Some itemized deductions listed on your pay stub relate to payments you authorized. These typically concern your health care plan, such as insurance premiums and contributions to a flexible spending or health savings account. If you elect to participate in a payroll savings program, your employer itemizes contributions for savings bonds and retirement plans such as a 401(k). When you choose employer-sponsored life insurance and short-term disability coverage, you’ll have itemized deductions for the premiums. Belong to a union? Then your membership dues come directly out of your wages. So will donations to charitable organizations, such as the United Way, when you decide to give a set amount per pay period.
The only mandatory itemized deduction you can control is federal income tax. When you were hired, you gave your employer a Form W-4 Employee's Withholding Allowance Certificate to determine how much tax to withhold. You should consider submitting a revised W-4 to adjust your withholding if you find you owe money at the end of the year, get a large refund or experience a life change such as marriage, parenthood or home purchase, according to the IRS.
- Cato Institute: The Cato Journal -- Evolution of Federal Income Tax Withholding…
- Tax Policy Center: Tax Policy Briefing Book 2008 -- State and Local Tax Policy
- Internal Revenue Service: Topic 751 -- Social Security and Medicare Withholding Rates
- Internal Revenue Service: Understanding Taxes -- Module 1 Payroll Taxes and Federal Income Tax Withholding
- PrimePay: Mandatory & Voluntary Payroll Deductions
- Treasury Direct: Payroll Savings Option in Treasury Direct
- State of Washington: 25.50 Payroll Deductions and Reductions
Trudy Brunot began writing in 1992. Her work has appeared in "Quarterly," "Pennsylvania Health & You," "Constructor" and the "Tribune-Review" newspaper. Her domestic and international experience includes human resources, advertising, marketing, product and retail management positions. She holds a master's degree in international business administration from the University of South Carolina.