(This is the first installment in a series of blogs that answers your questions about common paycheck deductions.)
Question One: If I Earn $20.00 an Hour Why is My Check Less than $20.00 an Hour?
Good question! People accustomed to being paid as independent contractors are often shocked by the deductions from their paychecks when they work as employees. What’s going on here?
When you are an independent contractor, you are essentially in business for yourself. Like any other employer you are responsible for your own expenses including taxes and insurance coverage that various employers need in order to operate.
When you are an employee, you are also responsible for your income taxes: the difference is that your employer is required by law (federal and state) to deduct a specific amount of money from your paycheck on your behalf. The total amount of deductions is called “withholding”. In addition to withholding income tax, your employer must also withhold other amounts mandated by law such as Social Security, Medicare, and State Disability Insurance (SDI). The withholding amount is then sent to the government on your behalf, and this amount then becomes a credit in your favor when your file your income tax returns for the year, or make a claim for Social Security, Medicare, or state disability benefits.