How to handle your financial life

How to Handle Your Financial Life

Money may seem like it’s just a tool you use to pay for the things you want, but there’s a lot more to it than that. Managed properly, your money can grow and become a resource not only for buying things, but for ensuring you have a comfortable future.

Part of that proper management involves paying taxes, protecting yourself and your property with insurance, and making sure you invest for the future. It’s all interconnected, so having a grasp of how it all works now can help you be proactive as your financial life becomes more complicated.

How taxes work

Let’s start with taxes. If you get a regular paycheck, you know that a portion of your income is withheld for taxes. Your income — the amount you make before taxes — is known as gross income. The portion you actually receive after taxes is known as net income.

If you work for someone else as an employee—whether that’s lifeguarding at the local pool or stocking shelves at a grocery store—your employer will handle taking out payroll taxes for you. If you have a side hustle like babysitting or mowing lawns, and you make more than $400 a year, you’ll have to pay those taxes yourself. You’ll also have to fill out a tax return, which is a form that, among other things, tells the government how much income you made. Tax forms can be complicated, so it’s good to get some help filling them out.

If your employer takes out payroll taxes for you, and you make less than $12,550 a year, you won’t have to file a tax return.

Here are the most common taxes taken out of your paycheck:

  • Federal income tax. Based on how much money you make—and that includes tips—the government will decide how much to take out of your paycheck

  • State income tax. Some states also charge income tax, so you’ll want to keep that in mind, especially if taxes aren’t being automatically taken out of your paycheck.

  • Social Security Tax and Medicare Tax. Companies hold back a certain amount of your paycheck to send to the government to fund Social Security and Medicare. That is what’s known as payroll taxes.

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