Who’s been nibbling your paycheck?
It’s payday! Whoo-hoo! But wait a second–looks like a little mousie has been nibbling at your total. FICA? SOCSEC? Who are these mysterious organizations who shave a little off of every dollar you earn?
There’s nothing mysterious about them–it’s your friend Uncle Sam, a.k.a. the U.S. Federal Government, and those are the taxes you pay when you work in the U.S. It’s called “withholding.” You can’t avoid paying taxes, but at least you can know what they are and why you pay them.
This famous musician spent years paying $19.7 million in back taxes. He blamed the deficit on bad advice from his accountants–and had the self-confidence to spoof his tax troubles in a 2003 Super Bowl commercial in 2003. To learn who it is, scroll down for a link to the answer!
Let’s take a look at the big withholding categories. Depending on your employer and your state, you may see other deductions other than the ones we list here. But just about everyone will have to pay these. Next to the name, we list the common abbreviations that you might see on your paycheck.
Federal income tax (FIT)
These taxes are used to keep the Federal Government running. They pay for things like the armed forces, the Federal Bureau of Investigation (FBI), the Environmental Protection Agency (EPA), the salaries of administrators and congresspeople, and tons of other government programs. And a big chunk pays the interest on the national debt–almost $430 billion in 2007!
You pay: 10% to 35% of what you earn, depending on how much you make.
You get: the Federal Government!
FICA Social Security (FICA-SS, SOC SEC, OASDI)
FICA is the Federal Insurance Contributions Act. Social Security is the part of FICA that provides monthly income to people when they retire from work or become disabled and can’t work.
You pay: 6.2% of your pay up to $102,000.00
You get: Social Security benefits when you retire or are disabled. Usually, the more you pay into Social Security over your life, the more you get out when you retire.
Medicare provides health insurance to people who are 65 or older and the disabled. The Federal government also helps pay for state-run Medicaid, a medical insurance program for low-income families.
You pay: 1.45 % of your pay up to $102,000.00
You get: Medical insurance when you retire or are disabled.
You’re not alone–or are you?
If you work for someone else, you’re only paying half of your payroll taxes. Your employer pays the other half, plus some other things like federal unemployment insurance tax. But if you work for yourself, you pay both portions. Who said self-employment was easy?