What are some things I need to know while on the job?

Understanding Your Paycheck

Receiving a paycheck can first make you happy because you can take care of your finances and get on with your life. However, the happiness might fade when you see what you take home compared to what you earn is a lot less. You might wonder where all your money goes.

Say you make $12 per hour and you work 40 hours a week. Your salary, or gross pay, is $480 for one week. Your gross pay is money earned before your employer deducts taxes, insurance, and possibly other items. These deductions lower your paycheck by 20 to 30 percent. So in our example, your $480 dollars is reduced to $388—your net pay—after deductions.



Taxes and Deductions
Everybody pays taxes on money earned. Taxes are payment to the government. The money is used to pay for roads, schools, the military, and fire and police departments. Tax deductions from paychecks typically include the following:

Income tax withholding. Money withheld by your employer to pay for federal, state, and sometimes, local taxes. Federal Insurance Contributions Act (FICA) tax pays for Social Security and Medicare. Social Security is a government program that pays retirement and disability benefits to workers. Medicare provides health insurance for retirees and the disabled.

Insurance. An employer also might take money out of your paycheck to pay for your portion of health, life, or disability insurance costs.

Retirement. Some employers offer retirement savings plans, such as a 401(k) or 403(b). Participating in them is optional. With a plan like this, you contribute a portion of your pay to a retirement savings plan, which accumulates money tax free until you retire. These retirement plans can be an important part of your financial fitness after you retire. If you decide to participate—which is a good idea—your employer will deduct your contribution from your paycheck and put it into your retirement plan. You specify the amount you want to contribute to the retirement plan.

Wage garnishment. A court can order your wages to be garnished if you owe past-due child support, taxes, or school loan payments, or have a judgment against you to pay old debts.

Withholding. On your first day of work, you will fill out a W-4 form. This form, called the “Employee’s Withholding Allowance Certificate,” is required by law. It is used to determine how much tax to deduct from your paycheck.

The form asks you to specify the “number of withholding allowances.” Claim one withholding allowance for yourself, your spouse, and each of your dependents (generally, one for each child).

The higher the number of allowances, the lower the amount of tax withheld from your paycheck. If you claim too many allowances, you might end up not paying enough tax during the year. That means you’ll owe taxes when you file your income tax. Avoid that if you can. It could turn out to be an unexpected expense and force you to use credit to pay for your other monthly expenses.

If you are unsure how to fill out the W-4 form, don’t hesitate to ask your employer to help you.

The Earned Income Tax Credit (EITC)

How does it work? The EITC is a refundable credit. That means it reduces the amount of tax you might owe when you file your income tax. If some of the credit is left over, you receive as a refund. Here is an example: • Amount of Earned Income Tax Credit due: $1,700 • Amount of tax owed: $500 • Amount of refund: $1,200

This tax credit helps reduce taxes for low-income employees. It could be an important part of your financial fitness if you qualify. Getting the EITC depends on:
• How much money you earn
• Whether you are married or single
• How many children you support
• How much money you have in savings or investments

You must file an income tax return to claim the Earned Income Tax Credit—even if you don’t owe any taxes. You can claim this credit on either the “long form” (Form 1040 or Form 1040A) or the “short form” (Form 1040EZ).

Volunteer Income Tax Assistance Program (VITA) You may qualify for free income tax preparation services as part of the VITA program. Call 1-800-829-1040 to locate a VITA site in your neighborhood. Or, ask your Habitat advisor about VITA.

Be sure you are not missing out on the Earned Income Tax Credit! Check with your employer, mentor, or your Habitat for Humanity advisor to find out if you qualify for the EITC.


Advance Earned Income Tax Credit

How do you know if you qualify? It depends on three things: • Your income (check the Advance Earned Income Tax Credit Questions and Answers for current income limits) • If you expect to have a “qualifying” child • If you expect to qualify for the Earned Income Tax Credit

If you expect to qualify for the Earned Income Tax Credit (EITC), you may also qualify for the Advance Earned Income Tax Credit. Remember, the “credit” is a refund. The Advance Earned Income Tax Credit allows you to get part of your refund in each paycheck. You don’t have to wait until you file your annual income tax forms to get a refund.

To apply for the Advance Earned Income Tax Credit, fill out and sign Form W-5, and give it to your employer. Go to www.irs.gov to get the most current Form W-5.

What You Need to Know About the Advance Earned Income Tax Credit
•	You must be employed by a business. If you are self-employed, you cannot apply for this credit.
•	If your income increases or you no longer have a “qualifying” child, you must fill out a new Form W-5. Give it to your employer to stop the advance payments.
•	If you discover that you don’t qualify for the Earned Income Tax Credit after all, you must pay back to the government any money paid to you as an Advance Earned Income Tax Credit.