Hey friend what are some of the most common misconceptions people have about their paychecks??
Hey friend!
The most common confusion I saw was about how taxes are calculated—especially federal income tax.
If you’d ever like to see how FIT (as the industry abbreviates it) is calculated, search up Publication 15-T and grab the PDF published by the IRS. You may need Publication 15 to confirm your federal taxable wages.
The most common question I got while I was the person processing payroll was “Why didn’t I have any FIT withheld? That can’t possibly be right, can it?” And in fact, it can! And usually is, in these cases!
People don’t realize how close they are to the cutoff of not making enough to have FIT withheld. But if you’re an hourly employee making somewhere around $12-$15 per hour, you can just work a day less out of the week and suddenly your pay isn’t large enough. If you have a decent amount of your pay going to pre-tax benefits, like insurance for medical, dental, or vision—or if you contribute a lot to a 401k plan (which does not have federal and state income tax apply, but still sees social security and Medicare taxes taken out)—then these deductions can put your taxable wages below the threshold to have any FIT withheld.
The other thing is that people underestimate how much claiming one or more dependents can reduce your per-pay-period FIT. As of 2020, dependents are factored into to FIT calculations as the equivalent tax deduction amount (so $2k per dependent). Tax calculations take the 2k yearly deduction and divide it by the number of pay periods you have, then reduce your FIT taxes by that amount. So if you’re paid biweekly (26 times each year) and claim 2 dependents, your federal income taxes are reduced by $153.85 every time time you get paid! For a lot of people, that is more than enough to leave them owing 0 for FIT.
This is probably long enough for now, but very high earners ALSO misunderstand FIT. Any time you hear someone complaining about their raise bringing them into a new, higher tax bracket…just know that they’re revealing their total lack of understanding for marginal tax rates.
