Your First Paycheck: Where Did the Rest of It Go?

Gross Is What You Earned, Net Is What You Get

Gross pay is your rate times your hours. Net pay, sometimes called take-home, is what actually arrives after deductions. The gap is usually somewhere between a fifth and a quarter, and it surprises nearly everyone the first time.

When you plan around a job, plan around net. Rate times hours is a number you never see.

The Deductions, One at a Time

Federal income tax

Withheld from every cheque based on the W-4 form you filled in when you started. It is an estimate, not a final bill. When you file a tax return, the estimate gets trued up: too much withheld and you get a refund, too little and you owe.

If you work part time and earn below the filing threshold, you may get all of it back. That is a real reason to file even when you do not have to.

Social Security and Medicare, together called FICA

These two are fixed percentages and you cannot opt out. Social Security is 6.2% of your pay and Medicare is 1.45%, which is 7.65% together. Your employer pays the same amount again on top, which you never see.

This is the one people find most annoying at seventeen and it is genuinely buying something: paying in builds your eventual entitlement, and the disability cover attached to it applies now, not in fifty years.

State and local tax

Depends entirely on where you live. Some states take none.

Anything else

Health insurance, a retirement contribution, a uniform deduction. These vary, and they are the lines worth querying if you do not recognise one.

The W-4 Is Not a Trap

The form you filled in on day one tells your employer how much to withhold. Fill it in carelessly and you either lend the government money for a year or owe a lump at tax time.

If you are a student working part time and nobody else can claim you, you may be able to claim exemption from federal withholding, but only if you owed no tax last year and expect to owe none this year. Get it wrong and you will owe. If you are unsure, leaving it at the standard setting and getting a refund is the safer error.

You can change a W-4 whenever you like. If your hours jump, it is worth revisiting.

If You Are Paid in Cash or as a Contractor

Two things to know, because they catch people out.

If you receive a 1099 rather than a W-2, nothing has been withheld. The money is yours to hold but the tax is not, and you may owe self-employment tax covering both halves of FICA, roughly 15.3%. Setting aside a portion of every payment is the only thing that makes this survivable.

If you are paid in cash under a normal job, the tax still applies. And being paid cash with no payslip, no withholding and no record means no Social Security credit and no proof of income when you eventually want to rent somewhere.

What to Do With It

The advice that actually works at this stage is embarrassingly simple.

• Send some to savings automatically on payday. Set it up once so it happens before you can spend it. The amount matters much less than the habit; a small transfer you keep beats a big one you abandon.
• If there is a retirement plan with a match, take it. An employer match is part of your wage. Declining it is agreeing to be paid less.
• If you have earned income, you can open a Roth IRA. Money put in at seventeen has longer to grow than money put in at any other point in your life, and that length is doing most of the work.
• Keep your payslips. Digital is fine. You will want them for tax, and eventually for renting.

One Warning

A first job makes you a target for a specific scam. A "recruiter" offers a job, sends a cheque to buy equipment, and asks you to forward part of it. The cheque clears, then bounces weeks later, and the money you forwarded was real. No legitimate employer sends you money before you start work.