Understanding your first paycheck (and why it’s so much smaller than you thought)

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You get your first job out of college. You can finally breathe a sigh of relief — you have post-grad plans! You can confidently answer that nerve-racking question: What are you doing after graduation?

But as soon as you accept that job offer, the train leaves the station pretty quickly! A whole lot of big financial decisions come at you fast like getting an apartment , paying your bills and setting up a budget to make sure your math checks out.

One of the most shocking things is when you get that first paycheck — and how small it really is! You knew some taxes would be taken out but most of us are unprepared for how much really comes out.

“A lot of times when people accept their new job offer, they think, ‘Oh my goodness,’ like $40,000 a year is like winning the lottery when you’ve gone from making like $4,000 a year over the summer, you know?” said Sophia Bera, a financial advisor at Gen Y Planning. “And so I think what people don’t realize is, then how little that actually translates to in their net pay.” Let’s do the math

Say you agree to a salary of $65,000. What is your actual take-home pay?

The biggest chunks that come out are taxes — both federal and state. And, if you work in New York City, like so many college grads dream of, you also pay New York City tax.

Federal tax rates are fixed and you can check your brackets here . So, for example, if you make $65,000 in 2022, your federal tax rate would be 22%, plus 5.97% New York state tax . New York City tax is another 3.8%, so you are looking at nearly 32% in taxes.

Taxes vary from state to state, but they typically range from 0% to 13%. (Seven states have no income tax!) California, Hawaii and New Jersey have the highest income taxes in the country, while Florida, Alaska and Texas are among those with no income taxes.

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Additionally, Social Security and Medicaid are withheld from your paycheck during every pay period. Withholdings are an amount from your paycheck taken out to pay federal income taxes. They are dependent on not only your income, but also your number of dependents, which, if you’re right out of college, is typically 0 or 1.

Pretax items like health-care and 401(k) contributions can also be deducted from your paycheck. However, these taxes and contributions are dependent on your salary.

″​​It’s going to be very different for someone making $80,000 or $40,000 or $100,000,” said Douglas Boneparth, a financial advisor at New York City-based Bone Fide Wealth.

Generally speaking, you should be prepared for taxes and other deductions to be around 30% of your income. That doesn’t mean it will be exactly that amount — it could be more, it could be less. And, you should absolutely do the math to figure out your exact rates. But, just use that to get your head around the fact that a good chunk of your salary goes to taxes.

To figure out what the take-home pay would be in that scenario, simply multiply the salary times 0.70. (That’s 70%, which is what’s left after you deduct 30%.)

That means, in the case of our $65,000 example, your take-home pay would be around $45,500 per year. Divide that by 26 (assuming you are paid every other week) and each paycheck will be $1,750. A warning for freelancers

One really important thing to note is if you accept a freelance job, you have to ask if your employer is taking taxes out of your paycheck or not.
If they are, the above calculations are a fairly good gauge of your take-home pay, though you probably won’t have deductions for a 401(k) or health-care benefits. (You’ll have to make those on your own, so don’t assume that’s just money back in your pocket.)If your employer doesn’t take taxes out, then you are on the hook to pay not only your tax rate but additionally what your employer should have paid. That could be 50% — half of your paycheck — going to taxes. This could be a really rude awakening if you are assuming that […]

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