When you look at your paycheck, you'll often see multiple numbers. The biggest number typically reflects your gross wages, but another number will often refer to what are called federal wages. Below, we'll talk about the difference and how each number affects your taxes.
Gross wages explained
Your gross wage is the total amount of pay you earned before your employer made any deductions. If you're paid on a salary, it usually equals your annual salary amount divided by the number of pay periods in a year. For hourly employees, gross wages are equal to the number of hours you worked multiplied by your hourly wage rate, adjusted for any overtime you work.
Gross wages also include bonus amounts. If you get a bonus at the end of the year, then you'll notice that gross wages will go up during that period, or you might get a separate paycheck that only includes the bonus amount.
Why federal wages are usually smaller
The number for federal wages is smaller than your gross wages because the federal wage number reflects deductions that aren't included in your taxable income. For instance, if you contribute part of your paycheck toward your 401(k) retirement plan, the amount you contribute will reduce your federal wages. Money that's taken out of your paycheck to cover the employee cost of health insurance coverage also comes out of federal wages, and if you choose to participate in a flexible spending account or health savings account program that your employer offers, then the money you set aside for those purposes also lowers your federal wages.
Even with all these deductions, your federal wages will usually be higher than your actual take-home pay. That's because some of the money that's taken out of your account is still subject to tax. For example, the money that goes toward Social Security and Medicare payroll taxes doesn't reduce your taxable income, so it's included in federal wages even though it's taken out of your paycheck. The same thing goes for certain voluntary withdrawals that you arrange to have taken from you pay, such as contributions to a charitable fund.
When tax time rolls around, federal wages become much more important, because they reflect the amount on which you're going to pay income taxes. By being aware of deduction opportunities that are available to you, you can arrange to have your federal wage number be lower than it might otherwise be and save taxes in the process.
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