How to keep more of what you earn

We cleaned up the captions for reading and swapped in a few of our words, like “workshop” for “webinar.” Otherwise, the words are the speakers’ own. Check the nine notes above as you read.

Welcome and why your paycheck matters

0:00Matt Iverson-Comelo, host: Welcome, everyone. We’re going to get started here with the first workshop in our series of new presentations to people who’ve signed up at Advisers Give Back. I’m Matt Iverson-Comelo. I’m the executive director of Advisers Give Back. I have the privilege to do that. I’m joined today by Vidalia Cornwall, who’s going to be presenting. She’s a CFP® professional and a volunteer for Advisers Give Back, as well as Carly, who assists everyone who signs up. And so we’re really grateful that you’ve joined.

1:23And I think we’re ready to get started, so Vidalia, please take it away.

1:29Vidalia Cornwall: All right. Well, again, excited to be able to present this important topic to all of you. My name’s Vidalia Cornwall, and as Matt said, I’m a volunteer with Advisers Give Back, and I’ve been doing it for a few years. I also work with clients directly as an adviser, and I’ve seen just how important it is to understand your paycheck. It really is the foundation of your finances, and so knowing how to read the paycheck and how to adjust it if necessary is really important. So that’s what we’ll be going over today. So, like I was mentioning, why? Why are we focusing on paychecks out of all the various topics there are out there? It’s really your financial foundation. It’s your engine. Without understanding what’s coming in, it’s hard to plan for what’s going out and what you’re saving. It also helps you just have a better understanding of where your money’s going. How much is going to taxes, how much is going to benefits that might not hit your bank account, but are supporting you.

2:32Are there any tax surprises you can avoid? Many of us have had the experience of, unfortunately, owing at tax time, or maybe getting a refund we weren’t expecting. And either way, it’s nice to understand why that’s happening, and adjust if needed. And it also lets you make informed decisions, such as, is it worth it to pay for these benefits? Or how much can I afford to put into my 401(k), and how does that affect my take-home? So we’re going to be talking about this anatomy of a paycheck, and what you can expect to see on it. The text is a little small here, but hopefully you can all see there’s four things. Gross pay. This is what you are told that you’re earning when you sign up for a job. Whether it’s $15 an hour or $45,000, that’s the headline number, is gross pay. But, as we all know, that’s not what we normally take home. There’s a lot of things that come out first, and the two main categories are taxes. We’ll go through all the various taxes that can get taken out. And then other deductions, like paying for your benefits or retirement savings. And then net pay is what actually hits your bank account.

Tax rates, the W-4 form and breaking even at tax time

3:45Vidalia Cornwall: So, starting off on the tax side of things. Federal income tax withholding is something that most of us have to take from our paychecks, unless you are on the lower earning end of the spectrum. You may not actually owe federal income taxes if you’re at a lower income level. But for most of us, we are required to withhold federal income tax. And it’s based on tax brackets, which is a term that gets thrown around a lot. The important thing to understand about tax brackets is that they stack on top of each other. So, you have some income that will get taxed at 10%, and then some income on top of that will get taxed at 12. But you’re never going to move up a tax bracket and suddenly have all your income be taxed at the higher tax bracket. So it’s important to know you fill them up one by one, and gradually the income that falls into each bracket gets taxed at progressively higher rates. It’s determined by your W-4 form.

4:50So you probably filled this out along with a bunch of other paperwork when you started your job. It’s kind of a confusing form. It asks you some questions about whether you’re married and how much you want withheld, but it’s not super straightforward. We’ll talk a little bit more about that. But that’s the form that typically needs to be filled out, either online through your payroll system or as a physical form, if you want to adjust your withholding. And the reasons you might want to adjust could be maybe you’re getting some tax credits, as this visual shows. You might want to adjust down. If you know you’re getting some credits, you might not need to withhold as much from your job. Or, on the flip side, let’s say that you have some interest income, or maybe a side gig that you don’t get any taxes withheld from. You might want to have a little bit more withheld from your paycheck to account for that income. And the main point here is that if you have too high a federal income tax withholding, you’ll get a refund. If you’re too low, you’re going to have a tax bill. So, why is it important to try and target being even? Why do we not want a refund?

5:55You can think of a refund as you giving the government an interest-free loan during the year. You’re letting them use your money instead of you getting it in your take-home and be able to save it or spend it as you wish. So it’s not bad to have a small refund. In fact, it’s kind of nice, but we don’t want to see those refunds getting way too high, like thousands of dollars, when you probably would want that money during the year. So we want to aim to be roughly even. And then… What if you don’t withhold enough? Obviously, you have a tax bill to contend with in April, and that’s never fun. And additionally, if you really don’t withhold enough, you can end up owing penalties and interest to the government as well, which we definitely want to avoid. So the main point here is we want to use the W-4, take into account your brackets and your tax credits, and try and get you close to even. And maybe a small refund.

What comes out: taxes and deductions

6:56Vidalia Cornwall: So, while you can control your federal tax withholding, these other taxes, sometimes known as FICA taxes, Social Security and Medicare, or payroll taxes, these are not really that controllable by you. You can’t change how much is withheld here. Social Security is 6.2% of your paycheck, and Medicare’s 1.45. Your employer contributes the same amount to both. So that actually means that 12.4% of your gross earnings is going to the Social Security system, 6.2% from you, 6.2 from your employer. The employer portion doesn’t reduce what you get. That’s something they have to do on top of what they’re paying you in your take-home. So that does fund your future benefits, and not too much to go over here, because as I mentioned, there’s not much you can do about this one. This is going to be on almost every paycheck. Even if you have a very low federal income tax bracket and wouldn’t owe, you definitely would still have to pay Social Security and Medicare. Just one small detail here, it says Social Security up to wage limit.

8:06And that just applies to higher earners. If you make over around $170,000, around that benchmark, you actually stop paying Social Security on income above that. Note 1, above For most of us, we don’t hit that, but there’s definitely some that do. They would see that they are no longer paying that tax on those higher wages. All right, and then final type of taxes here, state and local taxes. I know we have viewers from across the country, so some of you may live in states where there’s no income tax. Others may live in states like New York or California that are known for higher income tax rates. So, this is more something that you could look into with an Advisers Give Back adviser or on your own to understand what your local tax rates are. Some states even have additional taxes that you might be paying into for disability insurance or things like that. Good to understand, but very location-dependent as to what your state and local taxes will be.

9:07And similar to federal taxes, if you do live in a state that has tax withholding, you may be able to adjust how much is withheld for your situation. So, some states have flat rates, and others have rates that go up as you earn more income. But oftentimes they have a similar form to the W-4 that you can fill out to change your selections. All right, so that covered category one of things that get taken out of your paycheck, which is taxes. Our second category is benefits and deductions, which generally we like those better than taxes. So, what are some of the things that fall in this category? A big one is any health insurance, or dental, or vision insurance. That’s one of the biggest expenses and deductions, and this is pre-tax. So, that just means that, let’s say you start out with $1,000 in your paycheck, and $100 of it goes toward your health insurance. You actually aren’t going to be taxed on that $100. You’d only get taxed on the $900. So, I’ll note as we go through what’s pre-tax and after-tax, but that’s what that means.

10:20So, we’ve got health insurance, fairly straightforward. Retirement plans, so many employers offer a 401(k), or maybe you have a pension that you’re contributing to. Or some types of IRAs for small businesses that come directly out of your paycheck. Those typically have options where you can either do pre-tax or after-tax. So you may or may not be reducing your taxes based on how much you’re contributing. And then finally, there’s these flexible spending or HSA accounts. These are generally to help you pay for health, dental, vision expenses that come up that aren’t covered by insurance. The HSA is associated with higher deductible health plans, while flexible spending accounts are available for lower deductible health plans. And there’s also one for dependent care. So if your employer offers that and you pay for childcare, you may want to look into that one. So, some of these things that you pay for, there’s other sorts of benefits, like maybe you pay for some life insurance or disability insurance. A lot of those other things are going to be after tax, meaning you’re paying for them, but it doesn’t reduce the income you actually get taxed on.

11:36The big ones are health, a pre-tax 401(k) and an FSA. Any dollar that you put into those accounts, or to pay for those benefits, will reduce the amount that you actually get taxed on, on your paycheck.

Reading your pay stub, and why it changes

11:51Vidalia Cornwall: So let’s look at an example pay stub we have here for this employee working for Avalon. There’s a few things that we can see looking at this paycheck. The first one highlighted is the year-to-date totals. Almost every paycheck will show you this, and it’s kind of cool to see what you’ve earned throughout the year. Even at the end of the year, check out your final pay stub to see what you actually made. So that’s this year-to-date amount, and we can see here the income. This person has some regular pay, a bonus, and some overtime. Then on their deductions, stands out to me is they’ve paid $10,000 in federal income taxes, as well as contributing to some other income taxes, this provincial income tax. So, I think this is a Canadian pay stub. It looks a little different than an American pay stub, but it’s got the same concepts going on.

12:46Number two, hours worked and rate of pay. So, most paychecks will show you somewhere your pay rate, whether it’s hourly or salary, and the number of hours. One thing that varies between employers, often, is how frequently you get paid. So, sometimes you might get paid twice a month, in which case you’re probably getting paid around the 1st and the 15th. Other times, you might get paid every two weeks, in which case you’ll have some months in which you receive three paychecks. So that’s something to watch out for as well. And you can tell: if you’re a full-time employee, if your pay stub shows that you’re working 80 hours in pay, that typically means you’re getting paid biweekly. And you’ll have those three-paycheck months. If it’s showing higher than 80, you’re probably getting paid twice a month. You can see the withholdings and deductions summary, that’s down here, where we can see the taxes withheld and the deductions. And then employer contributions.

13:45Those are often on a pay stub as well. If you get an employer match on your 401(k), that’s probably the biggest one. You’ll probably see that on your pay stub, though not always. And not every pay stub is the same, so I’ve come across some that are a little harder to parse out. For example, teacher pay stubs are actually a little bit weird sometimes, because teachers are often withholding money to get paid in the summer. So it’s like a deduction, but it’s not a pre-tax deduction. So if your paycheck doesn’t look this straightforward, don’t worry. Feel free to reach out to Advisers Give Back, and get some assistance in understanding what’s going on. So, some common questions that people have. We’ve got four here. Why did my paycheck change?

14:35Should I claim more or fewer allowances? Note 2, above What’s the difference between gross and taxable income? And where does my refund come from? So, why did your paycheck change? Well, there could be good reasons for that, like a raise. Or some reasons for this could be you opted into new benefits, and you’re having more taken out of your paycheck than you were anticipating. Could be a reason for a change as well. So, to know why your paycheck changed, you just want to compare one with the other. There’s also sometimes benefits that you only pay for once a month. Or income that only comes in once a month, or maybe you get bonuses. So there’s all sorts of reasons it could change, and definitely if you’re seeing major shifts in your paycheck, you’d want to look into that. Should you claim more or fewer allowances? This question is referring to, typically, the federal income tax withholding, and how much you want to have withheld from your paycheck. And as we talked about earlier, we’re trying to aim to be close to even on that. So, allowances is just a term for how much you are going to have exempt from taxation. So, this question’s really asking, should I have more or less withheld?

15:53And the answer to that is generally going to come from looking at your last year’s tax return, though not always, but that’s going to be your best guide. If you are consistently getting refunds, you may want to look at reducing your withholding. If you are consistently owing money, you may want to look at increasing it. What’s the difference between gross and taxable income? So, gross income, as we talked about, that’s the headline, that’s what you’re told that you make, let’s say, $45,000 a year. But there’s lots of things that come out of that, or could come out of that, that are not taxed. The big ones are going to be health insurance, dental, vision insurance, FSA, HSA, and pre-tax 401(k) contributions. Those are all going to reduce the amount of money that you get taxed on for your federal income tax and state income tax. Note 3, above So, taxable income will be your gross pay minus all of those pre-tax deductions.

16:56And then finally, where does my refund come from? A refund is really just you getting your own money back. Note 4, above It means that you paid in more than you actually owed, and so the government’s just been holding your money, and then you get it back. So it’s really just a return of your own money, typically.

How to change how much tax comes out of your pay

17:15Vidalia Cornwall: So, how to adjust your withholdings? If you’ve noticed that maybe you are owing money at tax time, or maybe your refund is thousands of dollars, and you’d rather have that money to work for you during the year, you can update your W-4. Depending on the company you work for, you may be able to do this online. Or you may need to actually look up Form W-4, and get a copy of it, and fill it out, and give it to your HR department. And there is an IRS calculator that you can look up. It’ll ask you to put in information about your past few paychecks and other income sources, and it will help tell you how to fill out that W-4. There’s also these calculators. This is sometimes something I like to use, because the IRS calculator doesn’t actually tell you what your withholding and your take-home will be exactly after you’ve adjusted things. Whereas this one, it’s from Gusto, a payroll provider, but there’s others out there on the internet. So you put in the state that you live in.

18:19There’s a salary or hourly version. And you can put in all of your deductions. So, if you’re wondering, all right, I’ve got this Form W-4. Right now I’m saying that I’m single, or right now I’m saying I’m married and I don’t have this box checked about multiple jobs. How would my paycheck look different if I did check that box on my W-4? You can use this online calculator and compare what is your take-home pay going to look like with certain deductions and tax selections versus others. So that’s how you can adjust your withholding. Like it says here, major life events, especially getting married or having a new child, are going to be big triggers for maybe potentially revisiting your withholding.

Save first: your retirement plan, your benefits and sending pay to savings

19:09Vidalia Cornwall: So, beyond just understanding your paycheck, what can this actually do to move you forward financially? So, once you have an understanding of your paycheck, it can help you know how much you can afford to contribute to your 401(k) or an automatic savings. And one thing to know: say you have a 401(k) and you contribute an additional $100 per paycheck, pre-tax. Because that’s a pre-tax deduction, your take-home pay is not going to be $100 smaller, depending on your tax rate. It might only be $75 smaller than what you were used to seeing before. Note 5, above And understanding the mechanics of why that is, and that it’s a pre-tax deduction can help you know that. And then reviewing your benefits annually is a great one. If you’re looking through your deductions, and there’s things on there that you don’t know what they are. Sometimes it might be legal insurance, or hospital indemnity, or AD&D coverage.

20:15Review your benefits guide, and if you’re paying for it, make sure that it’s a benefit you’d actually use. Keeping in mind that the providers are making money off of offering them, and knowing that a lot of employees don’t use some of those benefits. Especially those ones, like critical illness insurance, that are kind of smaller benefits. But if you have a lot of those, it can eat away at your take-home if you are stacking a lot of those benefits. So review those and make sure you’re opted into the things you need, but not paying for things you don’t need. I really like this tip here. Consider direct depositing to multiple accounts. One thing you could do with every employer is you could have some of your paycheck go to one account, like your checking, and another to savings. Note 6, above That way you could automate some savings, so you don’t even have to move the money over from checking. It’s already going straight to that savings account, based on what you can afford. That’s a great way to get savings out of sight, out of mind. You’re not even tempted to spend it.

21:16And then align your paycheck timing with bill due dates. Sometimes you might be able to flex on when certain bills are due, or change your credit card due date, to align with when you’re getting your paychecks. Not always an option, but something you can look into. So, to summarize, this is a great example. If you’ve got $1,000 on your paycheck, where is that money going? Because you’re probably not getting $1,000. So, federal taxes could be around 12%. Could be lower or higher, depending on your income situation. You’ve got that Social Security and Medicare coming out, maybe some state taxes, 401(k), health insurance. And you end up just having 63% coming home to you as net pay. But it is important to remember that these tax benefits and insurance, the 401(k), they are doing things for you. Those benefits and Social Security will be there for you when you need them. But I know it is kind of a bummer to have your paycheck be a lot smaller than what you might have expected.

22:22So, key takeaways… Look at those pay stubs, and try and understand what the line items are. Reach out if you need help with that. Through life changes, and even annually, it’s a good practice to make adjustments to your W-4 if you’ve noticed that you’re getting refunds or owing at tax time. Understand pre-tax and after-tax deductions. Sometimes paychecks will even have a helpful little asterisk by the pre-tax ones to help call those out. And then use your paycheck as a financial planning tool. So, if you have regular paychecks, you can budget around those. You could even set up those automatic savings deposits. And then, as some calls to action here, if you haven’t yet, take a minute to download your pay stub, or find your last pay stub. Make sure that you understand what each of those lines are saying. Check your W-4. You can use this QR code to go to that IRS calculator to make sure you’re withholding the right amount. [On screen: a QR code for the IRS Tax Withholding Estimator.]

23:23And of course, we wouldn’t be complete here without offering the option to meet with your adviser. If you’re already matched with someone through Advisers Give Back, you can reach out. Or you can also sign up through our platform and get matched with a CFP® professional who’s volunteering and would be happy to review your paycheck. Note 7, above

Q&A: paycheck calculators and state taxes

23:44Vidalia Cornwall: And I think that’s it. I’m available to answer any Q&A, if you have any questions.

24:08Carly, Advisers Give Back: Vidalia, can we share the website of where we can check the paycheck stubs with the net pay?

24:16Vidalia Cornwall: The IRS one?

24:18Carly, Advisers Give Back: Or the Gusto.

24:20Vidalia Cornwall: Gusto, yeah.

24:22Carly, Advisers Give Back: Thank you.

24:24Vidalia Cornwall: Yeah, so this is the hourly version. You can just Google Gusto Paycheck Calculator. And then they also have a salaried version. And it looks kind of like it’s for an employer. But I think it’s helpful for employees, too, for you to see what your hypothetical paycheck would look like with certain changes to your deductions. All right. Any questions?

25:12Matt Iverson-Comelo, host: There’s a question: is this nationwide, or different depending on states?

25:43Vidalia Cornwall: So, the things that are going to be the same nationwide will be federal tax withholding, the way your benefits work, FICA taxes. The only thing that will differ depending on states would be the state tax withholding portion of your paycheck. [A follow-up question:] And the state is the one where you reside, right? Yes, that’s correct. Now, if you’ve moved states, or maybe you work in two different states, things can get a little more complicated. But generally, yes, that’s going to be the state you reside in. That is where you’ll pay your state taxes. Note 8, above

26:44Matt Iverson-Comelo, host: If you have questions that occur to you after the fact, you can always send an email to info@advisersgiveback.org, and we’ll pass it along. We do appreciate everyone attending. This was our very first workshop, so we appreciate you joining our inaugural one. We hope that you’re able to attend others in the future. There’s a new workshop page on the Advisers Give Back website, so you can always check that for any upcoming ones. Note 9, above There’s some really good ones. There’s one about investing coming up. There’s another one around planning for 2026, just doing some general financial planning. And there’s one around 1099 versus W-2 for people who are doing more contracting work.

27:51So we appreciate you joining, and we hope you have a wonderful rest of your day. I’m incredibly grateful to Vidalia for putting this presentation together, and for presenting it as well, and to Carly for her ongoing support. So, thank you, everyone. And have a wonderful rest of your day. Thanks again. Thanks, Vidalia.

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