Hey! Where’d My Money Go?

Understanding Taxes
It’s Friday, and your boss hands you your paycheck for your first week of work. You rip it open with excitement only to find that it’s a lot less than the $280 you were expecting to receive.

Don’t worry; your boss didn’t make a mistake. Your check is smaller because of taxes. That’s right, if you’re making $7 an hour and working 40 hours a week, the paycheck you receive from your employer will be significantly smaller than $280.

Your employer keeps part of your money and gives it to the federal and, in some states, local governments. This way, you don’t have to worry as much at the end of the year about saving money to pay your tax bill, and the government doesn’t get all its money at one time, but instead gets a steady stream of money throughout the year.

This pay-as-you-earn system of taxation means that before you get any of the money you’ve been working for, some of it is taken out and deposited into an Internal Revenue Service account or a state account. At the end of the year when it comes time to file your taxes, that money is credited to you and sometimes even returned if the state and federal governments determine you didn’t make enough money to be taxed.

If you are working at a job where you receive tips, even those must be reported to your employer so that taxes can be withheld from them. Be sure to talk to your boss so that you know when and how to report your tips.

In addition to income taxes, your employer will also probably be withholding money from your paycheck for Social Security and Medicare. You are required to pay into these programs now, but you will be eligible to collect money from them when you are older. Generally employers withhold 7.7 percent of your pay for these programs and your employer contributes an equal amount of money for you as well, doubling the amount you’re paying into the system.

The amount of money that’s taken out of your check may be shocking, but don’t despair; you do have some control over how much money your boss withholds for taxes. You can talk to the people in the payroll department of your workplace and ask them about adjusting the amount of income tax withheld from each paycheck. On your first day of work, you filled out a W-4 form and the answers you provided to those questions helped your boss figure out how much money to take out of your checks for taxes. If you honestly feel that too much money has been withheld from your check, it’s possible that the form needs some adjustments.

Even if your employer is taking out the correct amount of money from your paycheck and it seems like a lot, there is a light at the end of the taxation tunnel. Come April, you will need to file a tax return and if the government took too much of your money based on the amount you earned in the previous year, you’ll get a check in the mail from Uncle Sam.

Don’t let taxes catch you by surprise. When you’re planning how many hours to work in order to make your car payment or buy that new stereo, remember that part of your money goes directly to the government. Find out how much money your employer is withholding from each of your paychecks and then plan accordingly. Taxes don’t have to be a bummer.