12 Tips for the Cheapest Way to Rent a Car

There’s nothing like the convenience and freedom of having a car at your disposal when traveling, but it can definitely add to the cost of a trip.

What’s more, it can be hard to know just how much a car rental will add to the bottom line because the daily rate you see advertised may wind up not reflecting the amount you will pay once surcharges are added to the bill. Additional insurance, mileage, and other fees can really add up.

But with some smart strategies, you can control the costs of renting a car. These include uncovering special offers and deals, knowing which day of the week is cheapest to rent a car, and avoiding those pricey add-ons that you don’t truly need.

Here, you’ll learn some of the best ways to rent a car for less.

12 Tips to Save Money on Car Rentals

These tactics can help you save money the next time you rent some wheels while traveling.

1. Understanding All Those Add-On Costs

At first glance, advertised deals on car rentals can seem inexpensive.

The sticker shock may come once you’re actually at the counter. That’s because, in addition to the base rate of a rental car, costs may include:

•   Additional driver cost. Are you going to be the only driver or will you be sharing driving duties with someone else? If someone else will be driving, it’s a good idea to add them to the rental to potentially avoid liability if something were to happen if someone else were behind the wheel.

•   Fuel Purchase Option (FPO). This option allows a renter to pay for the full tank of gas at the time of rental and return the tank empty. It may be cheaper to fill the tank yourself. However, if you are the kind of person who likely returns a car close to the deadline and is racing to catch a flight, the FPO can save time and might be worth it.

•   Fuel and Service. If you forgo the FPO and don’t return the car with a full tank, you will likely be charged for the cost of fuel, as well as a fee for the refueling service.

•   Insurance. Insurance can include Loss Damage Waiver, Liability Insurance, Personal Accident Insurance, and Personal Effects Coverage. This insurance may or may not be necessary, depending on your existing car insurance coverage or the possibility of coverage via the credit card used for the reservation.

•   Premium Emergency Roadside Service. This service can provide roadside assistance in the event of an emergency.

•   Additional fees and taxes. Fees and taxes are not optional and can add up. Taxes and fees are dependent on where you rent your vehicle (different states have different taxes). There is typically an additional fee for cars rented at an airport or a hotel.

•   Toll fees. This typically includes not only the cost of driving on toll roads, but also convenience fees for having a transponder included in your rental to seamlessly pay those charges.

Recommended: How to Save Money on Gas

2. Considering Your Insurance Coverage

One way to get the cheapest possible deal on a rental car is to make sure you’re not doubling up on insurance coverage.

Find out what your car insurance covers. It may cover collision damage, and your homeowner’s or renter’s insurance may cover personal items that could be stolen from your vehicle.

But the disadvantage would be that if the worst were to happen, you would need to file a claim through your personal insurance, which could cause your rate to increase.

As noted above, your credit card’s car rental coverage may be a money-saving option. This can be a good travel hack that allows you to waive the insurance offerings from a rental car company yet not need to use your personal car insurance to file a claim.

Some pointers:

•   If you are renting a car with a credit card, as many people do, find out if your card has the coverage you need. You can check your card’s benefits to see if it includes primary car rental coverage. If it does, it’s a good idea to read the fine print for exactly what the insurance covers, as well as any coverage limits.

•   Calling your credit card company, as well as your car and home insurance companies, with any questions can give you a full picture of whether or not added car rental insurance is necessary for your situation.

You may also be able to waive roadside service if you have a membership to another roadside assistance company.

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3. Looking Beyond Airports and Hotels

Because of the fees associated with renting from an airport or hotel — which can add as much as 20% to your total bill — it may be cheaper to rent from an outpost within the city.

The flip side is that it’s less convenient, and you may need to take a taxi or use a rideshare service to get to and from the car rental agency.

Comparing costs of rentals both at the airport and within 20 miles (adding in the cost of getting to that other location) can help you assess whether giving up some convenience will pay off.

4. Signing Up For Loyalty Programs

Before you rent a car, it can be helpful to sign up for several loyalty programs across rental companies. (To avoid junk mail, consider creating a separate email address to register for loyalty programs.)

Some rental car programs will give you an automatic percentage off just for being a member. Other rental car programs may give additional perks, such as upgrades or separate lines at the agency, which can help you avoid the hassle.

5. Using Your Memberships

There are various ways to snag a reduced price on your car rental, including working your memberships.

Many big-box stores and wholesale clubs have ties with rental car companies that can net you significant discounts if you’re a member. Auto clubs (like AAA), trade associations, unions, as well as AARP, may also offer rental car perks and discounts, including insurance on rental cars.

Shop around, and don’t be surprised if the most enticing deals emerge from an unexpected source.

6. Booking Early

Reserving a car as soon as you know your travel dates can be a money-wise move. Here’s why: Rental car companies often keep a limited number of cars in their fleets. As a result, they need to estimate demand several weeks ahead of time. To encourage customers to book early and help them manage their pool of vehicles, they may offer lower rates when you reserve in advance vs. last-minute.

Booking a car in advance can help you not only get a better deal but also help to ensure you’ll get the car you want. This can help you avoid paying for a Suburban when all you need is an economy car.

If you do book early, consider searching prices again right before your trip.

•   If you find a better deal last-minute, you may be able to request a price adjustment from your original agency.

•   Or you may be able to cancel your current reservation and book a cheaper reservation at another company.

Before you book, you may want to read through the cancellation policy and make sure there is no penalty for canceling.

7. Shifting Your Dates

Prices of rental cars can fluctuate based on demand, and these fluctuations can sometimes be significant.

Of course, you can’t always change the days of your trip. But as a frugal traveler, you may want to weigh the cost-benefit of not having a rental car for a few days to score a lower rate.You could reap significant savings.

The cheapest day to rent a car can vary depending on market demand, but you may see lower rates on Fridays and Saturdays, and the highest rates on Sundays, Mondays and Tuesdays.

8. Noting Any Damage Before You Drive Away

You may be eager to get on the road, but it’s a good idea to do your due diligence and make sure you point out and/or document any damage to the car when you receive it. Consider the following:

•   No matter how minor a scratch or ding, you could get charged for the damage unless you account for it on your rental agreement prior to driving away.

•   You may be asked to mark damage on the car rental agreement, but you may also want to take photos as well. That way, there is less likely to be any dispute about the extent of any damage or markings.

Recommended: Different Ways to Earn More Interest on Your Money

9. Paying Tolls in Cash if You Can

Rental car companies commonly tack on fees for using their transponder (the gizmo that lets you whiz past toll booths), in addition to the toll itself.

You may also have to pay a daily convenience fee for having the transponder even if you don’t use it.

To avoid using the rental company’s transponder, try these hacks:

•   Pay cash at tolls that still accept it. For cashless tolls, you may be able to pay online later.

•   It may also be possible to use your own transponder. Some transponders (such as E-ZPass) can be used in multiple states, so it could be worth doing your research beforehand to see if your personal transponder is accepted.

•   For a longer-term rental, you might consider buying a transponder or toll pass that is accepted in the state where you’ll be driving. In many cases, the fee for the pass goes into your account as credit for tolls.

10. Bringing Your Own Car Seat

Rental car companies may offer infant and child car seat rental options, but the additional charges can add up. You might pay $10 to $15 per day, per seat, plus tax, up to a cap of $66 and up.

In addition to the cost, you may not necessarily know the size and reliability of a rental car seat.

Obviously, it is not always convenient to bring your own seat, but It may be a better bet when possible. Even though car seats are bulky, airlines typically don’t charge baggage fees on them.

11. Think Small and Simple

This one may be obvi, but renting a larger or premium car will likely jack up your costs considerably. Though this is a no-brainer, it’s easy to creep into higher pricing tiers as you scroll through the options and see a cool SUV or convertible next to that economy sedan you originally thought you wanted to book.

For example, a recent search on Enterprise for a rental car found a compact car in Los Angeles for $75 a day, a mid-size SUV for $106 per day, and a convertible for $143 a day. That’s a major difference!

12. Let One Person Do the Driving

It’s not always possible, of course, to have a single driver (say, if you’re criss-crossing the United States), but for shorter distances, having just one driver can help you save money.

Many rental car agencies will add $10 to $15 a day for an additional driver who is not a spouse, domestic partner, or business partner. So, if you are on a trip with a friend and the distances are fairly short (perhaps zipping between Miami and the Florida Keys), having just one driver can help cut rental car costs.

The Takeaway

Car rentals often end up costing more than you expect, due to add-on costs and the details of when and where you rent a vehicle. To get the best deal on a rental, it’s a good idea to do some research in advance so you can get the best rates and opt out of the extras you don’t need.

You can also explore other ways to get a good deal, such as looking for discounts through clubs and organizations you already belong to, shifting your dates slightly, and trying other clever hacks.

If you, like many people, love to find easy ways to make the most of your money, see how opening an online bank account with SoFi can help you do just that. With a SoFi Checking and Savings account, you’ll earn a competitive annual percentage yield (APY) and pay no account fees, both of which can help your cash grow. You’ll also have Vaults and Roundups to help your savings grow, not to mention the convenience of spending and saving in one place.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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What Are Hardship Loans and How Do They Work?

Financial Hardship Loans: What Are They and How Can You Apply?

Some people may have emergency savings to dip into or family or friends who can help them out if the unexpected happens. But for those who can’t access such resources, help may come in the form of a hardship loan, a type of loan offered to help people get through financial challenges, such as unemployment or medical debt.

Taking out a hardship loan can offer the cushion needed until a person’s financial prospects brighten. There are a variety of hardship loans to consider, from personal loans to home equity borrowing, and each has its own application requirements.

What Is a Hardship Loan?

A hardship loan doesn’t have an official definition, but many personal finance institutions may offer their own version of hardship loans. At its core, a hardship loan is a loan that can help you get through unexpected financial challenges like unemployment, medical bills, or caregiving responsibilities.

What Can You Use a Hardship Loan For?

As one of the types of personal loans, a hardship loan typically works much like any standard personal loan. The borrower receives a lump sum of money to use as they need, with few limitations. Potential uses could include:

•   Rent or mortgage payments

•   Past-due bills

•   Everyday expenses like groceries and transportation

•   Medical needs

A hardship loan could overwhelm already strained finances, however. Debt in any form will have to be repaid eventually, with interest, even in the case of hardship loans.

Hardship Borrowing Options

When you’re experiencing financial difficulties, you may feel the need to make a quick decision. But assessing your options can help you find the best solution for your needs and financial circumstances. Here are some options you may consider when looking for financing during times of hardship.

Personal Loans

A personal loan allows you to borrow a lump sum of money, typically at a fixed interest rate, that you’ll then repay in installments over a set amount of time. Unlike a credit card, which is revolving debt, a personal loan has a set end date. This allows you to know exactly how much interest you’ll pay over the life of the loan (a personal loan calculator can always help with that determination, too).

The common uses for personal loans are wide-ranging. In addition to using a personal loan to help cover current expenses, you could also use personal loans to consolidate high-interest debt that you may have incurred, whether due to hardship or other reasons.

Typically, personal loan interest rates are lower than credit card interest rates, making them an attractive alternative to credit cards. When it comes to getting your personal loan approved, expect lenders to look at your credit history, credit score, and other factors.

Credit Cards

Some people also may use credit cards to cover hardship expenses. While this strategy can help in the moment, it can lead to larger bills over time.

For instance, a credit card that offers a 0% annual percentage rate (APR) could allow you to minimize interest charges throughout the promotional period. However, you’ll need to ensure the balance is paid in full before the introductory period ends. Otherwise, you could start racking up interest charges quickly, adding to your financial challenges.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending is becoming more common as people seek out nontraditional financing. P2P loans are generally managed through a lending platform that matches applicants with investors.

While it may offer more flexibility than a traditional loan, a P2P lending platform still looks at an applicant’s overall financial picture — including their credit score — during the approval process. Like a traditional loan, a P2P’s loan terms and interest rates will vary depending on an applicant’s creditworthiness.

Generally, lenders in the P2P space will report accounts to credit bureaus just as traditional lenders do. So making regular, on-time payments can have a positive effect on your credit score. And, conversely, making late payments or failing to make payments at all can have a negative effect on your credit score.

Recommended: Understanding How P2P Lending Works

Home Equity

If you own your home, you may consider borrowing against your home’s value. You could do this in the form of a home equity loan, a home equity line of credit (HELOC), or by refinancing your mortgage through a cash-out refinancing option.

With a home equity loan, you’ll pay back the amount borrowed (with interest) over an agreed-upon period of time. While a home equity loan is offered in a lump sum, a HELOC is a revolving line of credit that can allow you to withdraw what you need. However, HELOCs often have variable interest rates, which can make it challenging to plan for repayment.

With a cash-out refinance, on the other hand, you’d refinance your current mortgage for more than what you currently owe, allowing you to get a bit of extra cash to use as you need. This process replaces your old mortgage with a new one.

In all of the options outlined above, if you can’t pay back the loan or follow the agreed-upon terms, there’s the potential that you may lose your house.

401(k) Hardship Withdrawal

It also may be possible to withdraw funds from your retirement plan. Under normal circumstances, a penalty typically is incurred for early withdrawal. There’s a chance the penalty will get waived due to certain types of financial hardship, but exceptions are limited.

Additionally, making a hardship withdrawal from your retirement account means a missed opportunity for these funds to grow. This could potentially put your retirement goals at a disadvantage or later require you to come up with an alternative catch-up savings strategy. In other words, really pause to think it through before using your 401(k) to pay down debt or put toward current expenses.

Alternative Options

While you can use personal loans for a variety of financial needs, there may be other options to consider depending on your situation. For example, if you’re a single parent, you might consider seeking out loans for single moms or dads who have sole financial responsibility for their household. Here are some other options you might explore:

•   Employer-sponsored hardship programs: If you’re facing financial hardship, ask your employer if they have an employee assistance program (EAP). Financial assistance might be offered to help employees who have emergency medical bills, who have experienced extensive home damage due to fire or flood, or who have experienced a death in the family. Employees will likely have to meet specific qualifications to receive EAP funds.

•   Borrowing from friends and relatives: Asking for an informal loan from a friend or family member is certainly an option for getting through financial hardship, although not one that should be considered lightly. Having clear communication about each party’s expectations and responsibilities can go a long way to keeping a relationship intact. Consider having a written loan agreement that outlines details about the loan, such as the amount, interest rate (even if it’s nominal), and when repayment is expected.

•   Community-based resources: There may be specific grants within your community available for people with emergency financial needs. Organizations like 211.org help individuals find the assistance they need. Community-based social services organizations also may be able to make referrals to other organizations as needed.

•   Government programs: Federal and state governments list resources on their websites for individuals seeking financial hardship assistance. Depending on your circumstances, you may be eligible for certain government programs that could help reduce expenses for food, childcare, utilities, housing, prescription medication, and others.

The Takeaway

Researching all of your options for financial relief is a wise move. You might find help from government or community resources, your employer, or a friend or family member. Or, you might consider options such as a financial hardship loan, a home equity loan, or a P2P loan.

If you’re looking for financial help in the form of a hardship loan, a SoFi personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score*, and it takes just one minute.

See if a personal loan from SoFi is right for you


Photo credit: iStock/staticnak1983

*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How to Read a Credit Report

How to Read and Understand Your Credit Report

It’s a good idea to regularly review your credit report. Doing so can help ensure that the information used to calculate your credit scores is accurate and up to date. It can also alert you to fraud or identity theft.

Unfortunately, understanding your credit report can sometimes feel like a challenge — especially if it’s the first time you’re doing it. Below, we’ll explain how to read a credit report, as well as highlight some common credit report errors to look out for.

What Is a Credit Report?

Your credit report contains a large amount of information about your financial life and payment history. If you have credit cards or loans, for instance, those accounts and how you pay them are included in your credit report. Often, you’ll have more than one credit report, as creditors are not required to report to every credit reporting company.

Credit card issuers and lenders can pull these reports and review them in order to determine your creditworthiness. They will rely on this information to make a decision on whether to loan you money, as well as the terms they’ll offer if they do.

Who Compiles Credit Reports?

Credit reports are created by three national credit reporting agencies: Equifax, TransUnion, and Experian. The information the credit bureaus compile in credit reports comes from creditors — like lenders, credit card companies, and other financial companies — that submit information on your accounts and payment history to the bureaus.

Who Can See Your Credit Report?

Your credit report is accessed whenever a lender (or an employer or landlord) conducts what’s known as a hard credit inquiry. This is when a business accesses your credit report to make decisions about your creditworthiness, likely in order to make a decision about extending a loan (or a job or housing).

Hard credit inquiries will appear on your credit report, so you should recognize any credit inquiries that appear. They may also subtly affect your credit score. Multiple inquiries in a short period of time may signify to lenders that you’re seeking multiple loans, which may bring up concerns about your financial stability.

Your credit report can also be accessed by consumers (like you). The Fair Credit Reporting Act requires each of the credit reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. Your credit score will not be impacted when you request a copy of your own credit report.

How to Get a Credit Report

Each year, you have the right to ask for one free copy of your credit report from each of the credit bureaus. There are a few ways you can request it:

•   By visiting AnnualCreditReport.com

•   By calling (877) 322-8228

•   By downloading and filling out the Annual Credit Report Request form, and mailing it to the following address:

    Annual Credit Report Request Service

    P.O. Box 105281

    Atlanta, GA 30348-5281

You also can request credit reports from consumer reporting companies, though these may charge a fee. Additionally, you’re eligible to request free reports beyond your one per year under certain circumstances, such as being denied credit or due to potential inaccuracies because of fraud.

Also know that you can only check your own credit report — checking someone else’s credit report is generally illegal.

Recommended: What is a Charge Card?

Reading Your Credit Report

When you get your credit reports, it’s a good idea to read each section closely. Here’s a rundown of the sections you’ll typically find included, so you’ll know what to expect and thus how to read a credit report.

Recommended: Tips for Using a Credit Card Responsibly

Personally Identifiable Information (PII)

This section of the report is used to identify you. It contains basic information like your name, address, and place of employment. You may also find previous addresses and employer history listed here. Your employment history doesn’t affect your credit score. Rather, it’s included on your credit report only to verify your identity.

When scanning this area you’ll want to make sure that your name, address, and employer match up. Any incorrect or unfamiliar personally identifiable information (like company names you don’t recognize or employers you never worked for) may be a sign of identity fraud.

Personally Identifiable Information Included in Your Credit Report

•   Name(s) associated with your credit

•   Social Security number variations

•   Address(es) associated with your credit

•   Date of birth

•   Phone numbers

•   Spouse or co-applicant(s)

•   Current or former employers

•   Personal statements, such as fraud alerts, credit locks, or power of attorney

Credit Summary

This section summarizes information about the different types of accounts you have, including credit cards and lines of credit, mortgages and other loans, and any accounts that have been sent to collections. For each account, your credit report will include the date the account was opened, its balance, its highest balance, the credit limit or loan amount, payment status, and payment history.

As you read this section, make sure that all the information looks familiar. It’s not unusual for a credit report to have slightly dated information, such as a higher balance because you just paid off a bill this month. However, all information should seem recognizable. In particular, you’re looking for:

Unfamiliar accounts
Late payments that do not align with your records
Balances that do not match your records

Recommended: When Are Credit Card Payments Due?

Credit Summary Information Included in Your Credit Reports
Account information

•   Account name

•   Account number

•   Account status

•   Date opened

•   Account type

•   Credit limit or original loan amount

Payment information

•   Payment status

•   Payment status date

•   Past-due amount

•   Monthly payment

•   Late payments

Additional information

•   Consumer’s association with the account

•   Account terms

•   Comments from the creditor or at the consumer’s request

•   Consumer’s statements

Contact information for the creditor

Payment history

Recommended: What is the Average Credit Card Limit?

Public Records

The information in this section is pulled from public records and may include debt collections or bankruptcy information.

If you have any debt collections and bankruptcy on your record, it’s important to remember that they won’t stay there permanently. The following statutes of limitations apply to different types of debt, restricting how long the information will remain on your credit report:

•   Chapter 13 bankruptcy: Removed seven years after the filing date

•   Chapter 7 bankruptcy: Removed 10 years after the filing date

•   Late payments: Removed seven years after they occur

•   Payment defaults: Removed seven years after they occur

If you see information that’s not familiar, you’ll want to flag it, since this could be a sign of identity theft. You may also want to flag any information that is still on your credit report after the statute of limitations has expired.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Credit Inquiries

Credit inquiries list all parties who have accessed your credit report within the past two years.
These could be from lines of credit you opened, such as applying for a credit card, or from applying for a loan.

Both hard inquiries and soft inquiries will appear, though they have different impacts on your credit — hard inquiries will affect your credit, whereas soft inquiries will not. You can distinguish the two types of inquiries based on how they appear on the report:

How a Hard Inquiry Will Appear How a Soft Inquiry Will Appear
Business name Company name
Business type Inquiry date
Inquiry date Contact information
Date inquiry will be removed
Contact information provided by the creditor for the account

It’s a good idea to make sure you recognize any recent credit inquiries, as they can be a red flag for identity theft.

Why Credit Reports Are Important

Your credit report can play a critical role in determining your financial future. That’s because creditors will refer to your credit report to decide whether to approve you for a loan or a credit card and, if so, what terms they’ll offer you, including the interest rate. In other words, your credit report will help determine whether you’ll get the auto loan you need to purchase a new car, or the mortgage necessary to purchase a home.

It’s not just creditors looking at your credit report either — landlords, insurers, potential employers, and even phone and cable companies may look at your credit report as part of their vetting process. This is why it’s so important to understand what information your credit report contains, so you can know what information these potential parties can learn from viewing it.

Recommended: How to Avoid Interest On a Credit Card

What Information Is Not Found on Your Credit Reports?

One surprising piece of data that you may be surprised to find out credit reports do not include is your credit score. Beyond that, your credit report will not contain the following information:

•   Salary

•   Employment status

•   Marital status

•   Spouse’s credit history, if applicable

•   Assets, such as bank account balances, investments, or retirement accounts

•   Any 401(k) loans

•   Public records outside of bankruptcy

•   Medical information

•   Expired information

•   Race or ethnicity

•   Religious beliefs or information

•   Political affiliates

•   Disabilities

What To Do If You Find Errors on Your Credit Report

None of the information on your credit report should look unfamiliar. In fact, one of the main reasons you want to read your credit report is to make sure that your credit report matches your records.

But sometimes, there can be discrepancies. If you detect an error on your report, such as a payment incorrectly reported as late, you’ll want to file a formal dispute. You’ll need to dispute credit report errors with both the credit reporting company and the entity that provided the information (such as a credit card company).

When writing a dispute letter, you’ll want to include:

•   A clear explanation of what is wrong in the credit report.

•   Supporting documentation showing the information is inaccurate (such as a copy of a paid bill).

•   A request for the information to be fixed.

By law, the credit reporting company must investigate your dispute and notify you of its findings.

If you notice an error that suggests identity theft (such as unknown accounts or unfamiliar debt), it’s a good idea to sign up with the Federal Trade Commission’s (FTC’s) IdentityTheft.gov site in addition to alerting the credit bureaus. The FTC’s tool can help users create a recovery plan and figure out next steps, which may include placing a security freeze on your accounts.

The Takeaway

It’s easy and free once a year to gain access to your credit reports from the three major bureaus. Taking advantage of this service can help you maintain good credit and good overall financial health.

Reviewing your credit report can give you a chance to correct any errors, and make sure your credit report is an accurate representation of your financial situation. It can also alert you to any fraudulent activity. In addition, reading your credit report can help you understand how creditors see you as a borrower and cue you into any potentially problematic information that may lead to a lower credit score than you would like.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

When should you check your credit report?

The Consumer Financial Protection Bureau (CFPB) recommends checking your credit report at least once a year to ensure there are no errors and that all information is up-to-date. You might consider checking them even more frequently than that though to have the most accurate picture of your current financial situation.

What do the numbers mean on a credit report?

Your credit report may contain a variety of different numbers. This can include your name identification number, your Social Security number, the IDs for addresses associated with your credit, phone numbers, account numbers, and more. It can help to go through section by section if you’re unclear as to what a particular number means.

What should I look for on a credit report?

When reading your credit report, you’ll want to look out for any changes to your personal information, such as changes to account details, inquiries, or data available in public records. Keep your eye out for any errors or anything that otherwise seems amiss, as this could be a sign of fraud.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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How Income Tax Withholding Works

What Is Income Tax Withholding and How Does It Work?

“What happened?!” may be your response when you look at your paycheck and see all of those deductions, whittling your hard-earned cash down to a (much) lower figure than you expected.

And perhaps, if you look more closely, you’ll notice a line on your paystub that shows a major amount of money subtracted and think, What is withholding tax? And why do they take so much?

Federal and state withholding taxes are funds that your employer takes out and sends to the government. To put it another way, this is what “taxes withheld” means; the funds have gone to help federal programs. These taxes have a purpose, and in the long run, you’ll probably be glad they are deducted from your check rather than owed as a mega lump sum on Tax Day.

But that said, it can be wise to learn more about what income tax withholding is and what those funds do. Read on learn answers to such questions as:

•   What is tax withholding?

•   What are factors that determine withholding taxes?

•   How can you calculate withholding taxes?

What is Income Tax Withholding?

Many people think their taxes are due mid-April, but did you realize that, if you are a salaried employee, you are actually paying your taxes throughout the year? When you see those federal and possibly state and local taxes being whisked out of each paycheck, that’s exactly what is happening.

So what does withholding tax mean, and how does it work? A withholding tax is an amount, based on your salary, that your employer sets aside and then pays directly to the government on your behalf. It’s a credit against the full amount of personal income tax you will owe for the year. By doing this, your employer is helping you avoid paying all of your annual taxes come April.

That said, how much is deducted from your paycheck can vary depending on a variety of factors. You are able to designate what portion of your check goes toward your taxes on the IRS W-4 form (more on that in a bit).

•   If you allocate too much, that means more than necessary is taken out, and you will likely receive a tax refund when you file your taxes.

•   If you set aside too little, you will probably owe a balance or have what’s known as a “tax bill” due during tax season to make up the difference.

Your federal withholding tax rate depends on your income and tax bracket.

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Factors That Determine Tax Withholding

There are several factors that determine just how much tax is withheld from your paycheck, whether it arrives as a paper check or via direct deposit. Here are some of the factors that control the amount:

•   How much you earn; it’s likely that the more you earn, the higher the rate at which taxes are withheld

•   What your filing status is (for instance, single; married, filing singly; or married, filing jointly)

•   How many (if any) withholding allowances are claimed. Typically, if you claim a higher number of allowances, that means your tax deductions are lower. This will free up more cash to flow your way on each payday, but you might owe taxes when you file. If you have a lower number of allowances, that means more money is taken out for taxes, and you could wind up getting a refund when your tax return is processed.

•   Whether an employee decides to have additional money withheld each pay period so they won’t owe takes in April. Some individuals may ask their employers to withhold, say, an extra $100 or more per pay period if they find they typically owe taxes at year’s end.

Recommended: How to Reduce Your Taxable Income

What Is State Income Tax Withholding?

If you live in a state that charges state income tax, you will also see tax withholding for that on your paycheck. In terms of the different types of taxes collected, there are just nine states that don’t tax earned income. In other words, you will not pay state taxes if you live in:

•   Alaska

•   Florida

•   Nevada

•   New Hampshire

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming.

The concept of tax withholding works in the same way at the state level as it does at the federal: A certain portion is put toward your future state tax bill, and you may either owe or get a refund, depending on how much you paid in.

Quick Money Tip:Direct deposit is the fastest way to get an IRS tax refund. More than 9 out of 10 refunds are issued in less than 21 days using this free service, plus you can track the payment and even split the funds into different bank accounts.

What Is the Purpose of Tax Withholding?

As briefly mentioned above, tax withholding saves you from owing a huge bundle of taxes in April. If people were left to their own devices to set aside money for taxes, well, that might not always be a success. It can be hard to save money from your salary. Every time you receive your paycheck, there are bills to pay, dinners out and movies to tempt you, and vacations to plan and take.

If you received your gross vs. net income, you might spend more than you mean to and then wind up owing a large sum to the IRS when tax-filing takes place. This is one reason why the IRS spreads out the federal income tax withheld across paychecks throughout the year.

You don’t see the taxes you pay as such a large sum when bits are taken throughout the year, and you likely don’t miss that money the way you would if you paid all at once.

And the government probably prefers to receive revenue from federal withholding throughout the year rather than all at once. This money is put toward healthcare programs, education, infrastructure, and other things that keep the country moving forward.

Recommended: Your Guide to Filing Taxes for the First Time

Tax and Employment Documents to Know

When you are first hired at a company, you fill out a W-4 form that includes your salary and tax withholding. Whether you are single or married and whether you have dependents or other withholding allowances will determine how much of each paycheck is diverted toward your federal tax bill. You may also opt to have additional funds withheld from each paycheck.

Then when tax time rolls around, you will receive IRS Form W-2. This includes information on how much income you earned in a given tax year, as well as how much you paid in federal, state, and other taxes.

You’ll use this W-2 to file your taxes, and it will determine whether you receive a tax refund, owe more taxes, or break even.

Calculating Income Tax Withholding

It can take a bit of tweaking to find that balance between overpaying in federal withholding and having to pay more when you file your taxes.

Some people like getting a tax refund because it’s a lump sum they can put toward debt or invest. But realize that overpaying is a bit like giving the government a free loan throughout the year!

While there may be fast ways to get a tax refund, perhaps you’d rather just hold onto that money in the first place. If you better balanced what is taken out of your paychecks, you could take the excess you would have paid and invest it.

If you’re wondering what is a withholding tax allowance that’s right for you, there’s help. The IRS has a Tax Withholding Estimator you can use based on your current situation. In general, the more allowances or exemptions you have, the less taxes that will be taken out of your pay. And the opposite is true: The fewer the exemptions, the higher the amount of taxes that will be withheld.

While you aren’t asked to fill out a new W-4 each year, you may request one if you think you need to adjust the withholding amount.

Some of the times it might be wise to adjust how much income tax is withheld include:

•   Starting a new job or position

•   Having a child

•   Getting married or divorced

•   Buying a house.

Quick Money Tip:Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.

Can I Be Exempt from Tax Withholding?

To be exempt from tax withholding means that no federal taxes will be withheld from your pay. You might also have no state or local taxes (if applicable) deducted. Here are the ways in which someone might qualify to be exempt from such taxes:

•   If all of your federal income tax was refunded because you have no tax liability and you expect the same thing to happen this year, then you may be exempt from withholding taxes. (But note, Social Security and some other taxes may still be withheld as part of other types of payroll deductions.)

•   Another consideration: Certain types of income are considered exempt. For instance, money paid to foster parents for their taking care of children in their homes may be tax-free. Payments from workers’ compensation is another example of funds that may be tax-exempt.

The Takeaway

No one likes the idea of taxes, but the fact is that money is put toward things we all enjoy, like smooth roads and education programs. And federal withholding from your paycheck keeps you from having a giant bill when you file taxes.

The important thing is to understand how much is being withheld and knowing whether you need to modify your W-4 to find a better balance between overpaying and owing more money in taxes.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Does the government pay for income tax withholdings?

Money that is withheld from your earnings, known as income tax withholding, goes to the government. These dollars help pay for federal programs that benefit citizens and keep our country running, from education to transportation to economic security expenses.

How can someone qualify for withholding exemption?

To qualify as tax-exempt, you would have to have had all taxes refunded and have no liability in the previous year and expect the same status in the current tax year. Another consideration: Some forms of income may be tax-exempt, such as payments for in-home foster care of children or for workers’ compensation.

Why has my employer withheld too much income tax?

If your employer withheld too much income tax, then you will likely get a refund at tax time. You can update your withholding on your W-4 form; the more allowances you have, the lower the taxes that will be taken out.

Why has my employer withheld too little income tax?

If you wound up owing the IRS money at tax time, the issue could be that you have too many exemptions or allowances claimed on your W-4 form, meaning your employer is not withholding enough money from your paycheck. Adjust your W-4, knowing that the lower your number of allowances, the higher the level of taxes that will be taken out and sent to the IRS on your behalf.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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What Are the Common Types of Payroll Deductions?

Who doesn’t love receiving a paycheck and knowing you can use it to pay bills or maybe even indulge in a little splurge or two? But when you see just how much you are taking home as net pay vs. gross pay, it can be a little deflating.

Looking more closely at your paystub or direct deposit receipt, you’ll see several line items that are called “deductions.”

Deductions are all of the things that were taken out of your gross pay, leaving you with your net pay, or take-home pay.

While there are some deductions that are required by law and are out of your control, others are part of your employee benefits package, which means that you may be able to adjust them according to what works for you and your budget.

Read on for a paycheck breakdown that can help you understand exactly what is coming out of your paycheck and why, including:

•   What are common payroll deductions?

•   How do payroll deductions work?

•   What are tips to manage payroll deductions?

What is Net Pay?

Whether you’re paid hourly or by salary, your rate of pay is the compensation that you and your employer agreed upon when you accepted the job.

This number appears in official contracts and is referred to as your gross pay. However, it does not represent the actual amount that you will be paid.

Net pay, also referred to as take-home pay, is the compensation that is paid out via check or direct deposit to an employee. It is your gross pay with all the deductions taken out, which can make you think, “Wait, where’d my money go?” when it hits your checking account.

What Are Payroll Deductions?

So, to answer that question: Here’s where your money goes:

•   Mandatory deductions: By law, an employer must subtract various mandatory federal and state tax withholdings.

•   Elective deductions: Employers will also subtract costs for employer-sponsored offerings that the employee takes part in, such as healthcare, life insurance, and retirement.

Whether required or optional, these are pulled out of your gross pay and applied where needed. While you may feel disappointed to see these funds siphoned off, they have an upside. They are saving you from owing major taxes come April 15, and they are potentially helping provide important elements of financial fitness, like saving for your future. This knowledge can be reassuring, especially if you are filing taxes for the first time, and are feeling a bit shocked about the difference between your gross and net pay on an annual basis.

How Do Payroll Deductions Work?

As mentioned above, payroll deductions may be required, such as federal or any state taxes, or they may be optional (say, a 401(k) plan or health insurance). The mandatory and elective deductions are subtracted from your paycheck’s gross pay amount.

What remains after these payroll deductions is your net pay. This is the amount that is paid to you. You can typically see a breakdown of exactly what has been subtracted from your compensation by looking at your paystub. If you are paid via direct deposit, you will likely find this information online at your employer’s portal. If you receive a paper paycheck, the paystub is often attached.

Types of Payroll Deductions

As you look at your paystub and see all the deductions that are being taken out of your gross pay, you may want a bit of help understanding what’s what. Below are explanations of some of the most common paycheck deductions:

Federal Taxes

Federal taxes include all the taxes you are required by law to pay to the federal government. These taxes (which are often referred to as being withheld vs. paid) help fund the federal government, allowing them to invest in things such as infrastructure, education, and national defense, and provide services to the American people.

What is tax withholding and how much must you allocate towards it? When you were first hired, you likely filled out an Employee’s Withholding Certificate or W-4 form form and claimed the number of tax exemptions you have. This amount tells the federal government how much money to take out of each paycheck to cover your taxes. The more allowances you take, the less federal income tax the government will take out of your paycheck.

One way to ensure that you have the right amount of tax withheld for each pay period is to use the IRS Tax Withholding Estimator or speak with someone in your company’s HR department. You can tell them if you’re single or married, how many dependents you have, and if you have any other sources of income, and they should be able to help you fill out your form accurately.

It’s also a good practice to revisit your W-4 selections annually as significant life events may change your withholding and also because the W-4 form is periodically updated.

During tax season of each year, individuals who have overpaid in federal taxes receive a refund from the government. Those who’ve underpaid, however, are required to pay additional funds and possibly a penalty.

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State and Local Income Taxes

There are other types of taxes that will possibly be withheld from your gross pay. Many states require a state tax to help fund government projects and services. The amount can range anywhere from 3% (Pennsylvania) to 13% (California). To learn more about your state’s taxation policy, you can look at this map for details.

Just as with federal taxes, your state income tax will get deducted from your paycheck to cover taxes you may owe at the end of the year.

Social Security and Medicare

Another common paycheck deduction you’ll see: Social Security and Medicare taxes that are part of the Federal Insurance Contributions Act (FICA) tax, a group of payroll taxes collected from both the employer and the employee. As the name implies, these taxes fund our nation’s Social Security and Medicare programs, helping with income and insurance needs once you reach retirement age.

The tax rate for social security is currently 6.2%, and Medicare receives an additional 1.45% (employers match these tax rates, bringing the total of FICA tax contributions to 15.3%).

Wage Garnishments

Another possible payroll deduction to know about: wage garnishments. These are legal procedures designed to repay delinquent, outstanding debts, such as unpaid child support, overdue credit card payments, or even unpaid taxes.

Most wage garnishments are initiated by court order. However, the IRS and other tax collection agencies also levy for unpaid taxes in the form of wage garnishment.

Garnishments are made on earnings leftover after all legally required deductions are made. The actual amount of any garnishment will depend on the amount of debt owed and income earned.

Employee Benefits

Depending on where you work, you may be able to opt into a variety of benefits. Typically, these costs are automatically deducted from your paycheck.

If you sign up for your employer-provided health insurance, at least some of the cost is likely to be a type of paycheck deduction.

Under the Affordable Care Act, employers with 50 employees or more must offer affordable health insurance. As part of an employee’s compensation package, many companies will pay half, or another percentage, of the insurance premiums. The employee’s portion of those premiums is represented on a pay stub as a deduction.

Other benefits, like flexible spending plans, commuter plans, and life insurance, may also be deducted from your pay, depending on whether or not you opt into them and if your employer picks up the bill fully or partially.

Health insurance and other benefits typically come out before your taxes, and you may be able to reduce your taxable income by signing up for them.

Recommended: Guide to Employee Benefits

Retirement Contributions

Employee savings plans such as 401(k)s are a common benefit offered in the workforce.

If you opt into this benefit, your employer will deduct funds from your wage earnings and deposit them into a retirement account. (How much of your paycheck should you save? Experts often recommend 20% should go towards saving for retirement and other short- and long-term goals.)

Employees are typically able to choose the amount they would like deducted from their earnings for retirement savings. In some cases, employers may contribute an additional percentage of your salary into your retirement account.

Contributions to your 401(k) not only help you save for the future, but lower your taxable income, since they come out of your paycheck before taxes get assessed.

You’ll want to keep in mind, however, that there are yearly retirement plan contribution limits set by the federal government through the IRS.

Other Common Payroll Deductions

Depending on your workplace and career, other payroll deductions are possible. Among the ones you may find are:

•   Charitable giving plans

•   Payment for job-required items, such as tools or uniforms

•   Union dues

•   Professional certification or tuition fee deductions

Examples of Payroll Deductions

You’ve learned details about many types of payroll deductions above. In list form, examples of payroll deductions include:

•   Federal income tax

•   State and local income taxes

•   Social Security and Medicare taxes

•   Wage garnishments

•   Employee benefits

•   Retirement contributions

Steps to Calculate Payroll Deductions

Calculating payroll deductions is typically something done by employers, not employees. Here’s a quick overview of how the process typically works:

1.    Obtain a W-4 from employees indicating their withholding.

2.    Determine employees’ gross earnings, whether salary pay or hourly.

3.    Calculate any overtime for those employees who are not exempt and worked over 40 hours a week.

4.    Take any pre-tax deductions.

5.    Calculate and deduct federal income tax based on pay, withholding status, what tax bracket an employee is in, and other factors.

6.    Determine and deduct Social Security and Medicare payments.

7.    Calculate and deduct any state and local taxes.

8.    Take any other deductions, and move funds to the appropriate entity.

Tips to Manage Payroll Deductions

If you are an employee seeking to tweak your deductions, you will have a few options. You might update your W-4 to reflect more or fewer exemptions, depending on whether you want to reduce or increase the taxes withheld.

In addition, if you could use some breathing room in your budget during a financial crunch, you might decrease retirement contributions a notch to free up a little more money for bills.

If you are in a position to be managing payroll deductions, consider these tips for making the process run smoothly:

•   Develop organizational systems to manage forms, deadlines, and other aspects of the process. There are many digital and online tools you can use for this.

•   Keep up to date with federal, state, and local tax laws to make sure you are deducting the proper amounts; know the guidelines about, say, equal pay provisions; and more.

•   Automate the entire process with payroll software. This can save time and boost accuracy versus doing things by hand. Or consider outsourcing the responsibilities to an external agency.

•   Regularly update training for payroll and HR teams, if you employ them.

•   Don’t touch payroll taxes that are only paid quarterly. It may be tempting to dip into those funds before they are due and use them for other business expenses, but this is a very risky path to pursue. If you wind up being short when the taxes must be paid, you could face penalties.

The Takeaway

While you may be surprised to see all the deductions coming out of your paycheck, once you know what number to expect to see landing in your bank account each pay period, you’ll be able to plan your spending and budget accordingly.

It’s a good idea to check your pay stubs periodically to ensure that the deductions being taken out are accurate and align with your financial goals.

If you haven’t maxed out your 401(k) contributions, for example, you may decide to increase them as your income grows and you become more financially stable.

To make sure the appropriate amount of taxes are being withheld from each paycheck, you may also want to revisit your W-4 annually and make any adjustments as your circumstances change.

Another good way to keep close tabs on your earnings and spending is to open an online bank account with SoFi. With our Checking and Savings account, you’ll enjoy an easy-to-read dashboard, the convenience of spending and saving in one place, and automatic saving features that help you organize your cash, track spending, and stash your change with Vaults and Roundups. Qualifying accounts with direct deposit can get paycheck access up to two days early, which can give you a headstart on managing your money. And with SoFi, you’ll earn a competitive APY and pay no account fees.

Want your paycheck to work harder for you? SoFi Checking and Savings can help!

FAQ

What are some common incorrect payroll deductions?

Examples of incorrect employee payroll deductions are expenses that have to do with running the business, workers’ compensation premiums, and some personal protective gear costs. In addition, payroll deductions should not bring an employee’s income below minimum wage.

How do I report payroll deductions?

If you are an employee, your payroll deductions will be reflected in the end-of-year W-2 form that you receive. If you are an employer, you are likely filing IRS Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, which shows the wages you’ve paid and various taxes withheld.

What are the pros and cons of payroll deductions?

Payroll deductions are a fact of life. On the plus side, they whisk away taxes regularly so you don’t face a huge tax bill come April 15, and the money paid in taxes can help quality of life in America. Also, deductions like health insurance and retirement savings go towards achieving financial security. The main con, of course, is that you take home less pay than your gross earnings and may need to budget wisely to balance your spending and saving.

What are the categories of payroll deductions?

The main categories of payroll deductions are federal, state, and local taxes; Social Security and Medicare; employee benefits; and retirement contributions.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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