What is a Deduction?Money taken from gross pay for things such as taxes, health insurance, or union dues.

You may be surprised to learn that your take-home pay is less than what you’ve earned. Gross Pay is the money you earn on the job. Gross pay is what you earn before deductions.

Gross Pay versus Net Pay• Gross Pay is the

amount of money earned by an employee. If you make $7.25 an hour and you work for 40 hours, then you multiply rate x time to find your gross pay.

$7.25 x 40 $290.00

• Net pay is your take-home pay after deductions. If your deductions were $31.10, then you subtract your deductions from your gross pay to get your net pay.

$290.00 - 31.10 $258.90

Deduction What it’s for

Federal income tax Money paid to the United States Treasury

Social Security (FICA) Money paid to a federal plan that helps the elderly or disabled

Medicare Money paid to a federal plan that helps pay medical expenses for the elderly

State income tax Money paid to your state treasury

Medicaid (Disability Insurance)

Money paid to a plan that pays workers if they can’t work because of long-term illness or injury.

Union Dues Money paid by members of an organization that helps workers get what they need from their employers.

Personal Insurance Money paid to a personal insurance company for health, dental , or life insurance premiums.

So What are Deductions?A deduction is money withheld from your paycheck. Some common deductions are listed in the table.

Federal and state income tax, Social Security, and Medicare are taken from almost every paycheck. Federal and state income taxes are not deducted at the same rate for each taxpayer. The more you earn, the higher your taxes can be.

How much you pay in taxes also depends on whether you have an exemption. The number of exemptions you have usually equals the number of people you support. Supporting yourself is one exemption. More exemptions mean lower taxes.

FICA and Medicare are deducted as a percent of your salary. The percent can change from time to time. Read this press release from the IRS regarding Social Security deductions.

http://www.irs.gov/uac/Newsroom/IRS-Provides-Updated-Withholding-Guidance-for-2013

Practice and ApplyWrite the letter of the correct answer.

1. What is gross pay? a. Your full salary before deductions. b. Your salary after deductions. c. Money received for tips

2. What is a deduction? a. Money added to your salary. b. Money subtracted from your salary. c. Combined net and gross pay.

3. What is FICA? a. Union dues b. United Way c. Social Security

4. Which deduction is paid to the United States Treasury? a. State income tax b. Federal income tax c. United Fund

5. What does an exemption do? a. Lowers your taxes b. Raises your taxes c. Gives money to someone else

Now let’s look at this USA Today, tax rate calculator. Based on our yearly earnings, it can calculate our tax rate and tell us how our money would be spent.

http://www.usatoday.com/news/washington/tax-rates-spending.htm

Sources CitedFinancial Management, Globe Fearon 2003