The list of costs that will be deducted from individuals’ gross pay can greatly vary depending on where they live or work. Deductions that are common for nearly everyone in the United States include Social Security and federal and state income taxes. Individuals may also have funds taken from their gross earnings to fund retirement and flexible spending accounts (FSAs).
Gross pay refers to a person’s earnings before any costs are subtracted. This is not normally the amount of money that people take home because generally everyone will be subject to deductions of some sort. In the US, for example, most people are subject to the withholding of federal taxes. This is money that is taken from a person’s wages by her employer and remitted to the Internal Revenue Service (IRS). Federal taxes are collected and used to fund the government.
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Likewise, most US citizens also have state tax deducted from their gross pay. These funds are used to provide revenue for state governments and are collected by state tax agencies. The amount of state tax varies across the nation and may affect individuals’ decisions when they consider whether to take certain employment offers.
Deductions are also made to cover the expense of individuals’ access to certain federal programs. Social Security, for example, provides people with regular income once they reach a certain age or if they become disabled during the course of their lives. Medicare tax is deducted to help cover the costs for individuals’ health care once they reach the age of eligibility. Those people who are self-employed are required to deduct larger percentages of their gross pay for these costs than employees.
Funds contributed to flexible spending accounts (FSAs) are deducted from gross pay. This money is held in an account and can be accessed and used to pay for certain types of medical expenses. There is usually a maximum amount that can be contributed to am FSA on an annual basis. This limit may vary from one year to another.
Funds for retirement, such as those contributed to 401(k) plans, may be deducted from a person’s gross pay. This means that a person has not paid federal tax on this money, and it will be taxed when the individual accesses it. It is important to note, however, that all retirement fund deductions are not made from gross earnings. Some are taxed and then diverted into the designated account. Individuals should take note of which circumstance applies to them.