That's All I Get?
Why Paychecks Are Almost Always Smaller Than You Expected

By Karen Blumenthal
Staff Reporter of The Wall Street Journal

You've landed the job, put in the hours and now the first paycheck has arrived.

Brace yourself: It's almost never as much as you expect.

Ross Tyler, manager of stores' training at retailer Hot Topic, says store managers try to warn new employees about tax deductions. Depending on the region, up to 22% of the paycheck may be withheld for taxes, he says. Still, when new hires get their first check, he says, they often shriek, "I didn't know it would be this bad!"

Even after you've worked for many years, the amount of taxes taken out of your paycheck can still be a shock. Depending on where you live and how much you work, your paycheck may have a long list of deductions. The federal government, most states and some cities tax part of your income. And just about everyone pays Social Security and Medicare taxes, including those who are decades away from even thinking about retirement. These taxes and deductions account for the difference between your gross pay-the top line of your pay stub-and your net pay, the money you get to keep.

Before you start figuring out how you'll spend the money you've earned, here's a guide to what comes out of your paycheck and why:

Federal Income Taxes. One of the first things you'll be asked to do when you are hired is to fill out a W-4 form, which tells your employer how much to deduct from each paycheck for federal income taxes. These taxes help run our federal government.

In addition to your name, address and Social Security number on the W-4, you'll be asked how many "deductions" or "allowan-ces" you want to take. All taxpayers are entitled to a "standard deduction," an awkward way of saying that the first few thousand dollars you earn are tax-free, with the amount depending how many people you support. When you claim deductions on your W-4, you are estimating how much of your initial earnings will be tax-free. Generally, most students can claim one deduction-themselves.

Assuming you claim one, you will start seeing some taxes withheld from your paycheck once you earn about $120 a week or more.

Paying federal taxes is a two-part process. The money withheld from your paycheck may be more or less than you will actually owe. What you actually pay in taxes will depend on your income for the whole year. If your parents provide at least half your support, you will pay federal tax of about 10% or more on everything you earn over $4,850 in a calendar year.

For example, a student who earns $150 a week for an entire year would have annual pay of $7,800. About $208 would be withheld from her paycheck. To calculate her actual taxes, subtract $4,850 from the pay of $7,800. That leaves taxable income of $2,950-and a tax bill of $296. So even after the paycheck deductions, she would owe the IRS $88. That payment is due by April 15 of the following year.

State and Local Taxes. Most states and some cities also will take a slice of your paycheck, and each one has different rules for how much is taxed. In New York state, for instance, you may pay taxes on anything you earn over $3,000. You may also pay taxes to New York City if that's where you work. To find out your tax rate, look up income taxes on your state's Web site.

Social Security and Medicare. These federal safety-net programs provide income and health-care assistance to the elderly and the disabled. Both are costly and are completely supported by taxes from American workers. In theory, these programs will be around to support you when you retire, too.

Your employer will deduct 6.2% of each paycheck for Social Security and 1.45% for Medicare, or $7.65 for every $100 you earn. The deductions may be listed separately on your check or lumped together, and the Social Security portion may be labeled "FICA," which stands for the Federal Insurance Contribution Act.

If that seems like a lot of money, consider this: Your company is also paying in, out of its own pocket, an amount equal to 7.65% of your pay to Social Security and Medicare on your behalf.

For people with big aspirations, there is a silver lining. Social Security taxes apply only to your first $90,000 of income each year.

Voluntary Deductions. Many companies offer a selection of benefits to their workers, such as health insurance, and sometimes employees have to help foot the cost. If you want to be covered under your company's health plan, you may have to pay a monthly premium, which is deducted from your check.

Later, when you're earning more, you may also want to contribute to a 401(k) plan, which provides a nest egg for retirement, or put aside money for child care or medical expenses that aren't covered by insurance. Those dollars can be set aside pre-tax-that is, before any Social Security, Medicare or income tax is taken out-which adds to the value of the savings.