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Congratulations on starting your new job! You're making a salary and moving forward financially. But when you get your first check, you find a list of items and several deductions. What does it all mean? IncomeGross salary is the amount of money you were hired for, whether it is an hourly rate or salaried rate. If you are an hourly employee, to determine your gross salary, simply take your hourly amount and multiply it by the number of regular hours worked. For example, if your hourly rate is $25.00 and you work a 40-hour week, multiply $25 x 40. Your gross weekly earnings are $1,000; you would then multiply this by weeks worked to obtain your annual gross pay. The gross earnings amount can be substantially higher than your net earnings, which is your gross salary minus all of the taxes and other deductions. In other words, your net earnings are the amount of money you actually take home. The amount of overtime hours and the overtime rate may be the next entry on the income side of your paycheck. Overtime is generally time-and-a-half, but it can also be double-time or triple-time. Other sources of income can include bonuses, incentive bonuses, on-call base salary, etc. A. Standard DeductionsThere are several standard or base deductions that everyone who claims an income must pay. These are as follows:
B. Retirement Plan DeductionsYou are not required to participate in retirement plans, but often they are offered as a benefit of employment. It's always a good idea to take full advantage of these programs – especially if they are calculated at a pre-tax rate, like these plans below:
You can begin drawing from a retirement plan – for retirement income or other spending – at age 59.5 years. The withdrawn money is subject to federal and state taxes, which can be a substantial, depending on an individual's tax base. However, you withdraw money from the plan before age 59.5, there is a 10% IRS penalty in addition to federal and state taxes. Miscellaneous DeductionsMany employers offer a variety of benefits that are available through payroll deductions. Some of these include: • Group Life
Insurance – These policies generally
offer "one-times your pay" term plans, which mean
that if your income is $50,000, the insurance payout
would be $50,000. These plans have no underwriting
guidelines. They are offered to the employee free
or as an optional benefit (i.e., if you are given
a list of benefits to choose from). If you have
difficulty obtaining your own life insurance you
should take full advantage of this benefit –
especially if you own a home or have a family.
Some employers allow you to increase the amount
of the coverage to two-times or three-times your
pay. While the employer covers this premium increase,
any payout beyond one-times your pay is taxable.
(Note: Once you leave this employer the coverage
stops.)
• Disability
Plans – Short-term and long-term
disability plans are often part of the benefit
plans for larger employers. Disability is the most
common event in an employee's life and one of the
most underinsured events. The best advice that
I give to my clients is to have some sort of short-term
and long-term disability coverage. Short-term disability
generally covers the first 90 days of a disability
and long-term disability covers anywhere from two
years to age 65, depending on the plan. The longer
the covered period, the higher the costs to you.
Group plans have substantial discounts, which help
in the total out-of-pocket costs to you. Disability
plans may be paid for by the employer, or as a
shared employee-employer expense. (Note: Once you
leave the employer the coverage either stops or
can be carried on by you – thus paid for
by you – at a non-group rate.)
• Long-term care
– Many employers sponsor group long-term
care plans for employees. These plans provide a
good base plan of coverage. You can purchase a
private plan for additional coverage if needed.
It is advisable to buy these plans, if possible,
in your early 50s. (Note: These plans are fully
portable, meaning they go with you if you change
your employment situation or retire.)
• Savings Bonds
– Monthly or quarterly savings bond purchases
are available through many of the larger employers.
This is a safe, convenient benefit for a fixed
portion of your overall portfolio but the current
rate of return on your money is low. (Note: Once
you leave the employer you cannot participate in
this plan; however, the bonds in your possession
are yours to keep.)
• College Planning
– One of the most recent trends is to offer
a 529 Plan (a company-sponsored tuition savings
plan). This allows employees to save money toward
either their children's education or their own
education.
• Flexible
Spending Accounts – These are
pre-tax plans. The accounts are used to help employees
save money for childcare costs and for medical-related
deductibles and other expenses that are not covered
by their employer's plans. This is a great benefit
(if you closely calculate your yearly costs) because
it can lower your pre-tax income. Caution must
be used in calculating these deductibles and expenses,
because if you do not use these assets in the
given year you lose them. Nonetheless, for
those who have fairly predictable bills, such as
for prescriptions or daycare, it is worth the risk.
• Union Dues
– The dues paid to a union are taken out
of your paycheck with each pay period. If you are
working in a facility with a "closed shop," meaning
you have to be a member of the union, then these
dues are mandatory. Union dues must be itemized
on your tax form to be tax deductible. Many of these benefits will differ each year and with each new facility or union contract. The best benefits for you are the ones that lower your taxable rate, allow you to save for retirement, and minimize your personal costs each month. If you have any questions, your benefits coordinator, personnel director, human resources officer, or union leader should be able to help.
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