Understand Your Pay

Envelope of cashThe primary benefit of working is earning an income, but your earnings can include many different monetary and nonmonetary sources. 

Distinguish Different Forms of Pay

When you look at a job offer or think about a career, compare the type of pay that is common for that job or industry. There are several income influencers: 

  • Wages – Fixed payments on an hourly, daily or weekly basis. Keep in mind that minimum wages vary by state
  • Salary – This kind of pay usually is paid monthly or biweekly. Salary is usually expressed as an annual gross figure (before taxes and other deductions). To convert an annual salary amount to an hourly rate based on full-time employment, divide the annual gross salary by 2,080 hours (40 hours per week X 52 weeks). For example: $30,000 per year / 2,080 hours = approx. $14.42 per hour.
  • Commission – Sales jobs often offer commission pay, which means that you make more when you sell more or generate profits for the company. Sometimes you will be offered a base salary with commission or you might be paid a straight commission, which means that you are not guaranteed any salary other than a commission on sales.
  • Overtime pay – If your job qualifies for overtime pay, the Fair Labor Standards Act (FLSA) requires that you be paid “time and one-half” of your regular pay for each additional hour worked over 40 hours. You can find out more about overtime eligibility at the U.S. Department of Labor website
  • Tips – Tips are common in the food and hospitality industries. Be aware that workers earning tips often are paid less than the federal minimum wage or the minimum wage applicable in your state, and that it often is your responsibility as the employee to claim tips on your individual income taxes.
  • Bonuses – Many companies pay bonuses to their employees when the company or particular divisions in the company meet financial performance goals. Bonuses can be a percentage of annual salary or a set amount.

Gross Pay vs. Net Pay

It is important to understand the difference between your gross pay and net pay.

When an employer tells you what a job pays (whether it is expressed as $30,000 per year or $14 per hour), the amount he or she tells you is the gross pay — the total amount before taxes and benefits are taken out.

Your net (take-home) pay is the amount you will take home after deductions for payroll taxes and other items such as health insurance.

In addition, you may have other voluntary contributions to employer-sponsored retirement plans and savings plans that offset your taxable income before or after taxes.

Cash or “Under the Table” Pay

Money under the tableWhen you fill out a W-4, your employer will give you a paycheck with taxes withheld. However, you may run into a situation where an employer does not fill out tax paperwork and wants to pay you in cash. 

However tempting it may be, this is illegal. Talk to your employer about why you need to be paid legally, with a W-4. It benefits you to be paid legally because if you are not paid legally: 

  • You won’t be contributing to Social Security, and therefore you won’t be able to collect Social Security benefits when you retire.
  • You won’t qualify for unemployment benefits if you are fired.
  • You won’t be able to collect benefits with your state if you ever become disabled or injured on the job.
  • You won’t be building a legitimate employment history.

Note: Some jobs include tips as part of your compensation. In these situations, it is up to you and your employer to accurately report your tip earnings as part of your overall pay. Tip payments are legal, but be sure that you are reporting all earnings to the Internal Revenue Service.

Understand Your Taxes

Taxes calculator cash coinsOverall, the amount of federal and state taxes you pay through your paycheck depends on several conditions:

  • Current income tax rates
  • Your gross income
  • Your filing status (single, married filing jointly or separately, head of household)
  • The number of dependents and allowances you claim on your W-4 form
  • Work benefit programs that lower or defer taxes

Payroll Taxes

Your pay stub will show all the deductions your employer takes out of your paycheck, including these taxes:

  • What it is - The amount paid to the U.S. Treasury to support federal government programs and services.
  • How much it is - Marginal tax rates on the last dollar of income earned rate currently range from 10 percent to 39.6 percent of your taxable income, depending on your level of earning and filing status. 
  • What it is - The amount paid to your state government for state-funded programs and services.
  • How much it is - Forty-three states currently collect a state income tax, ranging from 3.22 percent to 13.3 percent. Each state determines its own tax bracket. 
  • What it is - The amount paid to the Social Security Trust Fund for Social Security and Medicare programs. 
  • How Much it is - The Social Security rate is 6.2 percent of the first $118,500 wages paid to you. Medicare is 1.45 percent of the first $200,000 paid to you and 2.35 percent on amounts over $200,000. Your employer pays a matching amount on your behalf.
  • What it is - The amount paid to your city or county for the privilege of working in that location. 
  • How much it is - Seventeen states currently have jurisdictions that collect a local income tax. The rate varies as a percentage of your taxable income. 

Get the W-4 Form Right 

Clipboard with W-4 form on itThe Employee’s Withholding Allowance Certificate (W-4) tells your employer how much federal income tax to deduct from your paycheck. 

To learn how to fill out a W-4, check out the IRS’s W-4 simulator

The key to filling out the W-4 correctly is to calculate how much you need to pay to the IRS so that you don’t end up owing a large lump sum in taxes. 

But you also might not want to have too much deducted (resulting in a refund) as this gives the government a “free” loan of your money. In addition, if you are a victim of tax refund identity theft, a lot of your money will be held up until your case is resolved. Ideally, the amount your employer withholds will match the amount you owe the federal government when you file your taxes. 


The IRS offers sample forms and an IRS withholding calculator to help you. If something changes significantly in your life — such as having a child, getting married or divorced, or changing jobs — you will need to fill out a new W-4. 

Claiming Allowances on the W-4

Wallet, cash and coinsWhen it comes to paying taxes, some people don’t like giving the government a “free loan” of their money, so they claim more allowances on their W-4 in order to have less tax taken out of their paychecks. Other people like getting a tax refund each year, so they claim fewer (or even zero) allowances on their W-4 in order to have more tax taken out of each paycheck and to receive a higher refund. 

How you claim allowances on your W-4 will affect your taxes in different ways: 

  • Claim all the legal allowances you’re allowed. The goal here is to have all the money you possibly can in your take-home pay. Your take-home pay will be greater throughout the year, allowing you to invest or put the extra money in a savings account where it can accrue interest. Remember, this strategy means you’re less likely to get a tax refund. 
  • Claim fewer allowances than you’re permitted. The goal with this strategy is to have more taxes withheld and end up with a refund due to you at tax time. The downside is you will have missed out on any interest or other earnings that money could have generated had you invested it yourself rather than “giving” it to the government to hold until tax time.

SAM tips

If you are self-employed, be aware that you are responsible for paying taxes throughout the year via quarterly estimated payments. Estimated taxes are due April 15, June 15, September 15 and January 15 of the following calendar year. After your first year of estimated payments, you generally will receive a “coupon book” from the IRS and a state/city tax agency with payment vouchers and mailing envelopes. 

Dependents, Exemptions, Deductions and Tax Credits

Calculator with house, graduate, car, medical bag, babyThe amount of taxes you pay depends on many variables including your marital status, how many children you have and whether or not you own a home, among other things. Check out the IRS tax tutorial site for more detailed descriptions:

  • Dependents: A qualifying child or qualifying relative, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption.
  • Exemptions: Amount that taxpayers can claim for themselves, their spouses and eligible dependents. There are two types of exemptions — personal and dependency. Each exemption reduces the income subject to tax. While each is worth the same amount, different rules apply to each.
  • Tax credits (child credit, child/dependent care credit, education credit, earned income credit): A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed. 
  • Tax deductions: An amount (often a personal or business expense) that reduces income subject to tax.

SAM tips

The income tax savings from a tax deduction depends on your marginal tax bracket. For example, in the 15 percent tax bracket, a $1,000 tax deduction will lower your tax liability by $150 (15% of $1,000). The other $850 spent on a tax-deductible item (e.g., a donation to a charity) would be paid out-of-pocket. A $1,000 tax credit would lower your tax bill by $1,000 regardless of your marginal tax bracket.

Verify Payment Amounts and Deductions

Magnifying glass and checkYou should verify on a regular basis that the amount you are being paid and your deductions are correct. Check your pay stub whenever:

  1. You start a new job and receive your first paycheck
  2. Your pay changes
  3. You receive a bonus
  4. You make a change to your benefits (e.g., adding or removing a spouse on medical insurance, changing contributions to 401(k) retirement plan, etc.).
  5. Your income reaches the Social Security tax threshold (currently at $118,500)
  6. You leave a job and receive your final paycheck
  7. You make a change to your W-4 form

If anything appears incorrect, work with your supervisor or human resources department to correct errors immediately. 

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