A Deep Dive into Paychecks, Taxes and Savings for High Earners

Wealth Advisor

In this video, Chris Pavcic offers an insightful look into the financial intricacies of payroll deductions and the importance of understanding where your paycheck goes, especially for couples earning a significant income. Using a hypothetical scenario of a couple with a combined income of $600,000 in 2024, Pavcic breaks down the calculation of taxable income after considering various deductions such as the standard deduction, contributions to health savings accounts, and retirement plans. He clarifies common misconceptions about tax brackets and how only the income exceeding certain thresholds is taxed at higher rates. Through a detailed analysis, including federal, state, and local taxes, as well as Social Security and Medicare deductions, Pavcic illustrates how these deductions impact the net take-home pay. The video further explores the effect of maximizing 401k contributions on take-home pay, ultimately demonstrating the balance between gross income and net income after taxes and benefits, providing valuable insights for viewers looking to optimize their financial planning and understanding of tax implications.

Video Transcript

You. In this video, we’re going to go through a sample cash flow for a couple and also explain where your paycheck goes in terms of taxes and deductions. So what we have on the screen here is estimated cash flow for 2024 for two people both earning 300,000 each or 600 total for the tax year here. So going over here to the right, both incomes combined, $600,000. As far as taxes go, what you’re actually taxed on isn’t the full gross amount here. So we get certain deductions that we can use to lower that taxable amount, one of them being what’s called the standard deduction. So this is a free, if you’re married, it’s a free 29,200 that can be deducted from your gross income. Above this, you can have contributions to a health savings account for this year, it’s 8300.


Or you can contribute to a 401K plan or 403 B plan, 457 plan, all these retirement accounts on a pretax basis, all of those things. So you can see earning 600 gross, but only taxed on this 562 number. All of those pretax deductions lower the figure that you’re actually taxed on. So this figure, the 562 moves over to the tax tables here. And so for 2024, the first 23,000 that you earn if you’re a married couple, gets taxed at 10%, 23 to 94 gets taxed at 12%, 94 to 201 gets taxed at 22, and so on. So a common misconception that we hear is say that you’re somebody that’s earning 389. Down here we hear all the time that I don’t want to earn 400 because now I’m going to go from the 22 to the 32% bracket and lose out on more taxes.


But it’s only the dollars that are in that next bracket. So it’s always a good thing to earn more because not all of your income is going to be taxed at that higher rate. It’s just the amount that goes over it. So total tax due, estimated tax due on this 600 federal would be 139,000 due. In addition, we’re here in PA, so wanted to do an example of using our state tax. So PA state tax is 3.7% that gets taken out. In addition, if you live somewhere that has local tax, our example, we’re using one and a half percent that gets deducted. And then Social Security, this is one that is going to vary based on what your income is. So it’s 6.2% of the first 168,600 that you earn for the tax year.


So if you’re somebody like in our example here, that’s earning 300,000, about a little over halfway through the tax year, you’re going to notice that your paychecks get a little bit bigger because you’ve already hit that 168 figure and the 6.2% is no longer coming out of your paycheck. So on the 600,000, the Social Security works out to 20,000, almost 21,000, because again, that’s capped at the 168 figure. And then on top of that, we have Medicare tax, which is 1.45% on all income. And then there’s going to be other payroll deductions like health insurance, other fringe benefits like parking, for example, which we’ll go through here in a moment, that also get deducted from your pay.


So lastly, assuming that both of these people are maxing out their 401k plans, the elective deferral amounts, 23,000 for this year, we’d expect on a total gross income of 600 that the net take home would be about 29,000 per month. So let’s go through, what does this look like if we just look at one of these people’s pay stubs? So this is assuming that somebody’s getting paid monthly. So 300,000 on a monthly basis works out to 25,000 federal taxes we just went through. You progress through each tier, 1012, 22, 24, and so on. So that gets broken up over the course of the year. And about 5800 would go to tax, pa, state tax, a flat 3.7%, local tax, Social Security and medicare. All of those get deducted. If you look at your paycheck, they usually separate it into these different categories.


Like we have here, one for taxes, which covers everything here, one for pre tax deductions, which again, these lower your taxable income. So contributions to an HSA would fall under here. Oftentimes health insurance shows up here. And then we can also have miscellaneous deductions which could be either before or after taxes. Things like parking or life insurance, disability insurance. Those are also going to show up on your pay stub. And then lastly, if you’re contributing to an employer savings plan, like a 401k here, in our example, those are going to show up under after tax deductions if you’re funding on a Roth basis, or you can also fund on a pretax, in which case they’d show up here at the top under the pretax deductions. But all in all, you see the 25,000. It’s a big number.


But then you only see a deposit of this 14,000. Your bank account. So if you’re wondering, where does all my money go from my paycheck, that’s it. It goes to taxes, benefits, and your 401k if you’re contributing to one. So let us know if you have any questions and hope this is helpful. You.

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