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For most employees, their gross pay – the full amount of wages or salary paid out by their employers – is always more than the amount of their paychecks. This is because of a number of common payroll deductions, some of which are mandatory, that employers withhold each pay period. Some of these payroll deductions you'll just have to accept, but there are a few that you can reduce or eliminate to take home more of your gross pay.
There is no getting around the fact that your employer must withhold federal income tax, as well as state and local income taxes if you live in a jurisdiction that requires it, from your gross pay. However, there's no reason to overpay these taxes during the year, which is why the Internal Revenue Service and state and local tax agencies allow you to reduce the amount your employer withholds. To reduce your tax withholding, you'll need to fill out a new W-4 form and submit it to your employer. Generally, the more allowances, credits and deductions you can claim on the W-4, the less income tax your employer will withhold from your gross pay.
Social Security & Medicare
On top of the income tax, employers also have a legal obligation to reduce your gross pay for Social Security and Medicare taxes. You may see this withholding reported on your pay stub as FICA, which stands for the Federal Insurance Contributions Act. The withholding for these taxes isn't something you can change, as fixed percentages are multiplied by your gross pay to arrive at the withholding amount. As of this writing, employers must withhold 6.2 percent for the Social Security tax and 1.45 percent for the Medicare tax from your gross pay, while some higher earners will see an additional .9 percent Medicare tax deducted from their gross pay in excess of $200,000.
Employee Elective Deductions
There are a large number of payroll deductions that your employer will withhold from your gross pay that are only done when you voluntary elect them. The most common example is the portion of health insurance premiums you pay to obtain coverage through your employer's group health plan. Other elective deductions include the amount you tell your employer to deposit into retirement accounts, such as a 401(k) or into health savings accounts or to donate to a charity. If you want to receive a larger percentage of your gross pay in your paychecks, you always have the option of choosing a cheaper health plan, reducing the amount you contribute to retirement and health savings accounts and directing your employer to no longer make those charitable donations.
Other Payroll Deductions
If the company you work for is a closed shop, meaning a condition of your employment is to maintain membership in a labor union, your employer may have to take union dues out of your gross pay each pay period. And if you have any consumer or back tax debts that remain unpaid, or have outstanding child support obligations, you run the risk of having your wages garnished, which can significantly reduce the amount of salary you'll see in your checks.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.
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