Is it an inconvenience? Yes. But we have to pay our taxes and be a responsible member of our community.
Understanding taxes doesn’t have to be complicated, and being conscious about how much you earn and spend is important. Especially today, when the prices are still rising.
In today’s article, we’ll break down the basics of taxes, gross pay and net pay, tax deduction, and help you calculate how much you earn per month. Let’s get to it.
What Is Gross Pay?
Gross pay is the amount of money you earn before the taxes are taken out. This includes not just your salary but also overtime pay and any bonuses you may receive.
For example, if you earn a base salary of $3,000 per month, get a $200 bonus, and work overtime for an extra $300, your gross pay for that month would be $3,500.
Net pay is the amount of money you receive after taxes and any other deductions you may have, like health insurance or retirement contributions.
Types of Tax Deductions
Tax deductions are expenses that the government lets you subtract from your total income, which lowers the amount of income that gets taxed. Here are some types of these deductions:
Standard Deduction
This is a set amount that everyone gets to subtract from their income. The amount you subtract depends on your filing status (single, married, widow, etc.). Most people choose to take the standard deduction because it simplifies the whole process.
Itemized Deductions
If you have certain big expenses, like paying interest on a home loan or giving money to charity, you can add them up and subtract them instead of taking the standard deduction. You only do this if these expenses add up to more than the standard deduction.
Some common itemized deductions are:
- Mortgage interest
- Property taxes
- Medical and dental expenses
- Charitable contributions
- State and local taxes
- Casualty and theft losses
Above-the-Line Deductions:
These are specific expenses you can subtract from your income even if you take the standard deduction. They include:
- Contributions to retirement plans
- Student loan interest
- Health Savings Account (HSA) contributions
- Educator expenses
Business Deductions:
If you run a business, you can subtract costs like buying supplies, using your car for work, or setting up a home office.
Types of Taxes
There are different types of taxes you have to pay. Here’s a breakdown:
1. Income Tax
This is the tax you pay on the money you earn from your job or business. The more you make, the more you have to pay. Income tax is usually taken out of your paycheck automatically.
2. Sales Tax
This is a tax you pay when you buy things like clothes or food. In some countries, you can see the full price on the items with the taxes, but in some, it is added at the register. The money goes to the state or local government.
3. Property Tax
If you own a piece of property, you have to pay property taxes. The amount you pay is based on the value of your assets.
You also have to pay taxes when purchasing real estate.
4. Payroll Tax
This is a tax that comes out of your paycheck and is used to fund Social Security and Medicare, which are programs that help older people and those who need access to medical care.
5. Capital Gains Tax
If you make money by selling things like stocks, bonds, or real estate for more than you paid for them, you have to pay tax on the profit you make.
6. Estate Tax
This tax is sometimes called the “death tax.” It’s paid on the value of money and property someone leaves behind when they pass away, but only if the estate is worth a lot of money.
7. Corporate Tax
Businesses pay this tax on the profits they make. The more money a business makes, the more corporate tax it owes.
8. Excise Tax
This is a special tax on certain products, like gasoline, cigarettes, and alcohol. Usually, it’s part of the price you pay at the register.
9. Tariffs
Tariffs are taxes on products that come from other countries. They are meant to protect local businesses by making imported products more expensive than local ones.
10. Inheritance Tax
Inheritance tax is paid by the people who inherit money or property from someone who has died. Not all countries have this tax.
How to Calculate Your Pay After Tax Deduction
So, in order to find out how much you are getting paid, you first need to find your gross pay (the total amount you earn before any taxes), find out how big your deductions are, and subtract them.
For example, let’s say your gross pay for the month is $3,000, and you have to pay $300 in federal income tax, $100 for state income tax, $230 for Social Security and Medicare, and $70 for insurance.
This would mean that your taxes add up to $300 + $100 + $230 + $70 = $700.
Now, we need to subtract the deductions from your gross pay:
$3,000 – $700 = $2,300
And $2,300 would be how much you get paid without the taxes, and this is your net pay.
You can use take home pay calculators to find out how big your salary is after all the deductions.
The Bottom Line
Understanding how taxes affect your earnings is key for staying on top of your finances. Remember, staying educated helps you make smarter financial decisions.
You just need to know your gross pay and all the deductions it will experience. The rest is simple math.
We hope we helped you learn something new today and learn how to make better decisions, and we wish you luck on your financial journey. And be sure to pay those taxes.
