Arik Armstead of the San Francisco 49ers at the NFC Championship game against the Philadelphia Eagles on Jan. 29, 2023.
Kevin Sabitus | Getty Images Sport | Getty Images
1. Know where your dollars are going
In the era of direct deposit and electronic records, it’s easy to let months pass without reviewing your pay stubs. But experts say it’s important to know where each dollar goes.
Like other W-2 employees’ pay stubs, Armstead’s includes a breakdown of gross and net earnings for one pay period — nearly $400,000 compared to roughly $200,000 — along with a summary of earnings to date.
You can also see an itemized list of taxes, including Medicare, Social Security, federal, state and local tax withholdings, and other payroll deductions, which bring Armstead’s net take-home pay down significantly.
“This is what everyone else’s paycheck looks like with much bigger numbers,” said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.
2. Monitor your withholdings
With those gross earnings of more than $4 million to date, Armstead quickly hit the top income tax brackets for both federal and California state taxes, said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
For 2023, the top federal income tax rate is 37% and the highest rate in California is 12.3%, with an additional surcharge of 1% for income of more than $1 million. “The more you make, the more you pay,” Lucas added.
Of course, working primarily in California, Armstead owes considerably more than an athlete living in income-tax-free states like Florida or Texas.
Like other W-2 workers, Armstead’s withholdings were his decision, elected via Form W-4, according to CFP and enrolled agent John Loyd, owner at The Wealth Planner in Fort Worth, Texas.
While it’s possible to withhold less than you’ll owe, you could risk underpayment penalties on top of a sizable income tax bill in April. “It’s super important for everyone to pay attention” when filling out Form W-4 and throughout the year, he said.
You can use the IRS withholding estimator to make sure you’re on track with withholdings and make adjustments through your HR department as necessary.
3. Max out your 401(k) to save on taxes
In addition to significant tax withholdings, Armstead also maxed out his workplace retirement plan for 2023.
There are limited ways to reduce your taxes as a W-2 worker. But you can reduce your adjusted gross income with pre-tax 401(k) contributions, experts say.
If you’re under age 50, you can defer up to $22,500 in 2023 and $23,000 in 2024. Savers age 50 and older can funnel an extra $7,500 into their accounts.
In 2022, only 15% of Americans maxed out 401(k) contributions, according to Vanguard, and Armstead is among those savers for 2023, his pay stub shows.