How to Read Your Paycheck: What’s on Your Pay Stub
The first thing you should do to understand your paycheck is to understand the basic information that it provides. This includes the deductions for various categories of taxes, insurance, and other items.
Here’s a simple breakdown of most pay stub deductions and what they are.
Your pay stub generally lists these items:
Your taxable income or earnings
Your gross pay, that is, the total amount of money that you earned on a specific paycheck.
Your net pay, that is, the amount of money that you take home or is deposited directly into your bank account.
Withholding taxes (including federal taxes, state taxes, Social Security, Medicare)
Other deductions for things like childcare, retirement programs, and paid time off/vacation.
Let’s go into a little detail about these fundamental parts of your paycheck starting with the withholding taxes:
Federal Income Taxes
Our federal government takes a part of your income from every one of your paychecks. This is your federal withholding tax — it is sent directly to our federal government.
The amount withheld is directly related to the amount of money you earn. A key factor in this calculation is how many deductions you selected on your W4 form.
On your W-4 form, you can make allowances for yourself, your spouse, and your dependents. For every allowance you select, less money gets withheld for federal taxes, and you get more money on your paycheck. And with fewer allowances, you receive less money on your paycheck.
State Income Taxes
Most states take an income tax from your paycheck. There are a few states that do not. State income taxes are taken directly from every check you receive.
The federal government requires every working person to contribute part of their paycheck to Social Security. This is the government-run retirement system set up in 1935. Every worker contributes 6.2% of their gross income directly to the Social Security fund. Every employer also pays an additional 6.2% for every employee on their payroll.
The federal government also requires every working person to contribute to Medicare, an insurance plan that provides hospital, medical, and surgical benefits for citizens who are 65 and older (and some people who are disabled). Every worker contributes 1.45% of their gross income to Medicare, and every employer matches this contribution with an additional 1.45% for every employee on their payroll.
If you have signed up for insurance plans such as medical, dental, or life insurance through your employer, your contribution will be deducted from your paycheck. Today, small businesses rarely can afford to offer these insurance plans. However, larger companies routinely offer one or more of these insurance options. You will often have to contribute to the plans i.e., your paycheck deduction.
Retirement Savings Plans
If you are in a company that offers a retirement plan, like a 401K, your contributions to the plan will be deducted from your paycheck. When you participate in a 401K plan, you usually choose a percentage of your pre-tax salary/income that you want to contribute to your 401K account. If your employer has any type of matching contribution, this type of plan is the best possible savings and retirement plan you can and should do.
Flexible Spending Accounts
This type of plan is not common, but some companies may allow you to set aside some money for health insurance co-payments, deductibles, and prescription drugs. Deposits to a flexible spending account are deducted from your pre-tax income.
Health Savings Accounts
Larger firms may offer a health savings account so you can set aside money for future medical expenses. To participate, most people will have to have a high-deductible health insurance plan. Deposits to a health savings account are deducted from your pre-tax income.
Why It’s Important to Check Your Deductions
Every paycheck you receive has a stub that includes year-to-date (YTD) fields for every withholding category. This way, you can track how much money you’ve paid for taxes, Social Security, Medicare, etc. during the year. Some employers may include listings of other contributions, e.g., 401K plan or a health savings plan.
One thing to remember. You are responsible for making sure there are no errors in your paycheck reporting. If your employer is large enough to have a Human Resource department, you should contact them with any questions you may have or if you believe there is an error on your paycheck. If you work for a small business, you should ask your manager or business owner if any questions arise.
Your paycheck also has your gross and net income year-to-date. You can see how much you have earned for the year, your deductions for the year and your take-home pay for the year.
Keep Your Paycheck Stubs Secure
Some paycheck stubs have sensitive information on them like your Social Security number, name, and address, etc. If you don’t retain them, you should shred them. If you do keep them, they should be locked in a secure place.