What’s my take-home pay?
It is that time of year, job offers are being sent out to my students. In addition to helping them navigate negotiating their first offer, we begin the planning process for their first paycheck.
How much will your first paycheck be if you accept a job that pays $60,000 a year in Cincinnati, Ohio?
To understand that, we need to cover everything from 401(k) contributions to taxes and health insurance costs. Let's figure out what your take-home pay will be!
401(k) Contributions
First on our agenda, let's talk about 401(k) contributions. This is a fantastic way to save for your retirement, and sometimes your employer will even match your contributions. In our example, the student contributes 6% of their salary and the employer matches 100% up to 6%.
So, they're putting in $3,600 annually into their 401(k) account, and the employer adds another $3,600 – that's essentially free money for the future! Also, investing in your 401k reduces your taxable income. Make sure to invest in your 401k, and maximize the match by the employer. In this example, you would be contributing $7,200 a year towards retirement.
Assuming that you invest this and earn 8% return, in 35 years you would have accumulated $1,326,591.
Health Insurance
While the exact amount for health insurance varies, for this scenario, let's assume the student's portion of the health insurance premium is $2,000 per year. This amount will be deducted from their paycheck to cover health insurance.
Taxes in Cincinnati, Ohio
Remember that both 401(k) contributions and health insurance costs are deducted before you pay taxes. That's one of the advantages of 401(k) contributions – they're tax-advantaged. Now, let's talk about taxes in Cincinnati, Ohio.
In our example, the student is estimated to pay approximately:
$8,700 in federal income tax
$1,661 in Ohio state income tax
$1,134 in Cincinnati city tax
About $5,400 in FICA taxes (which include Social Security and Medicare).
The total tax liability is $16,895.
This is an estimate because taxes are complicated and include many variables. There are several websites that help you calculate your expected taxes. I like this one from ADP.
Calculating Take-Home Pay
Now, let's put it all together. To calculate the student's estimated take-home pay in Cincinnati, Ohio, we need to subtract all these deductions from their gross salary of $60,000. After accounting for 401(k) contributions, health insurance, and the various taxes, their take-home pay comes out to be approximately $37,105.
I like to calculate my paycheck on a monthly basis, so that is equal to $3,092. If you are paid twice a month, you would divide by 24. If you are paid bi-weekly, you would divide by 26. Either way, most of my bills are paid out monthly, and therefore I plan for my money on a monthly basis. You do what’s best for you!
In the next week’s post , we'll discuss how to plan on budgeting and understanding your monthly spending behavior using this information.
Takeaway
Understanding how your first paycheck works is essential. I am a big believer in planning for your money. Each dollar has to have a purpose, and this approach will help you plan accordingly for your first paycheck.
To prepare for next week’s newsletter, how would you spend $3,092?
Thank you for being part of our community of curious minds. See you all next week.