Expat Series : Anatomy of my paycheck

When I was trying to figure out how much I would need to make in the US, and after I negotiated my salary, one of the things I had a hard time finding out is how a gross annual figure translates into monthly income. If you’re in that same boat, here’s a quick rundown of what my paycheck looks like.The first thing you need to know is your company’s payroll calendar : how often you will be paid. Some common ones :

  • weekly : paid every week, often on the same day of the week.
  • bi-weekly : every other week.
  • semi-monthly (also called bi-monthly) : twice a month.
  • monthly.

The bi-weekly and semi-monthly calendars can be confusing :

  • Bi-weekly means every other week, on the same day of the week. For example, ever other Friday. Most months, this translates to 2 paychecks, but two months a year are 3-paycheck months. You annual salary is divided by 26.
  • Semi-monthly or bi-monthly means twice a month, on fixed dates. For example, you will be paid on the 15th and 30th of every month. Your annual salary is divided by 24.

Once you know that, you know how much your gross salary will be every paycheck. But how do you figure out how much you will actually get into your back account ? Payroll deductions can and will vary a lot depending on your specific situation, your benefits, or your location.

I’m paid on a bi-weekly schedule, every other week. Yours might look different than this, with different categories but there’s a few constants and it might help you get an idea of what to look forward to.

Gross Pay Description
Bi-weekly Basic Salary Annual Salary divided by 26
Paid Time Off Paid Time Off, Holidays, Sick Days…
Overtime 1.0x
Overtime 1.5x
Overtime 2.0x
Pre-Tax Deductions Description
Medical Pre-Tax Health Insurance
Dental Pre-Tax Health Insurance
Vision Pre-Tax Health Insurance
401(k) Contribution Retirement
Other Deductions HSA, FSA, Dependant Care FSA…
Taxes Description
Federal Witholding Tax
Federal Social Security 6.20%
Federal Medicare 1.45%
California Witholding Tax
California Disability Tax 0.90%
After Tax Deductions Description
Misc Deductions Additional Benefits, Relocation stuff, loans, life insurance…

 Pre-Tax Deductions

These depend on your benefit package. Most common are health insurance premiums, and retirement contributions if you have a tax-advantaged retirement account like a 401(k).

They are deducted from your gross pay, thus reducing your income tax liability.  401(k) contributions are still taxable for Social Security, Medicare and CA disablity taxes.

The health insurance premiums entirely depend on your plan, and how much your employer contributes to them.

I have listed a few things in Other Deductions that are mainly also health insurance-related. They also depend on your plan and benefit package. I will try and write a separate article on them.

The 401(k) contributions are your own choice (provided you have access to a 401(k) of course). You choose which percentage of your salary to save into the account. I’ll get back to that in another post, but for now, keep in mind that this money stays yours, and the more you contribute, the less income tax you will pay now (and the more money you will have for retirement).

Taxes

That’s the big chunk 🙂

Federal Tax Withholding

This is your income tax. Obviously, the amount heavily depends on, wait for it, your income (duh), but also on how many allowances you choose. This is complex enough that I won’t get into the details (and I’m really not qualified to do so) but here are a few things you need to know :

  • First things first, you can find the 2015 tax brackets here.
  • They are marginal tax rates. If you’re, say, in the 25% bracket, it doesn’t mean you’ll pay 25% on the total. Head over there for details.
  • The rates apply on your total gross salary minus total pre-tax deductions.
  • Unlike the French system, you pay taxes up front, so it’s an estimation. You will file your taxes at the end of the (fiscal) year and will either end up getting a refund from the IRS, or owing them some more money.

You can adjust the amount of the withholding by choosing allowances. More on that in another post. Note that this will not change your total tax liability for the year. It will only adjust your monthly withholdings.

Finally, if you’re in the mood to do some heavy math, some relevant IRS publications :

Social Security and Medicare

They’re the other two parts of the Federal Income Tax system. They have a fixed rate :

  • Social Security : retirement benefits. 6.20% up to $7,347 per year (that’s a gross salary of $118,500)
  • Medicare : basic health insurance for 65+ year-old people and some disabled younger ones. The rate for 2015 is 1.45%, with an additional 0.90% for any wage paid above $200,000 in a year.

Unlike the Federal Income Tax Withholding, you need to add back your 401(k) contributions to calculate how much you will pay for these two.

State Income Tax

Some states don’t tax salaried income (Texas, Florida,…). You will be liable for state income tax in 41 States. Each one of these have its own definition of “income” – some do not tax wages but tax dividends -, and its own tax rates, exemptions, income floors, etc.

Unfortunately for me, California is the State that has the highest income tax rate (and sales tax too). I call it the Palm Tree Tax. Like the Federal Social Security Tax, the California Disability Tax is capped (up to $939.4 per year in 2015) and includes your 401(k) contributions.

After Tax Deductions

They can be anything. Anything that is taken out of your paycheck after you have paid taxes on that money. A few examples include :

  • Misc. Insurance premiums, like Life Insurance
  • Any loan your employer may have given you. For 3 years, I had a deduction for the car loan I got as part of my relocation package. Glad that one’s gone now 🙂
  • Any other employer-specific deductions (like charity giving, on-site gym membership, whatever).
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