Good news: you finally got that raise. Bad news: your paycheck still isn't as big as your thought it would be. The problem is deciphering your pay stub; where does all that money go that doesn't go to you? Don't worry! Pay stubs are pretty easy to read with some common sense and a little bit of digging.
Pay Stub Basics
The most important number is often called earnings or gross wages. If you are a salaried employee, this should be equal to your salary divided by the number of paychecks you earn in a year. If you're an hourly employee, this number should represent the number of hours you worked in a pay period times your hourly wage (plus overtime, if any).
The second-most important number is net pay, net wages or net earnings. This represents how much money should be either direct deposited in your bank account or written on the check attached to your pay stub. Sadly, it is less than the first number, often much less.
Most everything else on your pay stub will help you get from your gross earnings to your net earnings with a couple of exceptions for informational items that may appear.
Another quick item to note is that most items on your paycheck may be shown with both a pay period column and a year to date column. This information will help you figure out how much a particular category has added up to over the course of a year and can be very handy for tax-planning purposes.
Three big federal taxes normally show up in this section.
Fed, fed withholding, or federal income taxes are taxes remitted to the federal government on your behalf for your income taxes.
Med or Medicare taxes should be 1.45% of your taxable income (not gross or net pay). It may be listed under another name, but if it represents 1.45% of your federal taxable wages, it is most likely Medicare taxes.
The last federal tax is commonly referred to as OASDI or Social Security taxes. These should equal 6.2% of your federal taxable wages up until you hit the wage base maximum, which changes yearly.
State income tax withholding is another tax line item in most states, but not all. Generally, these are listed as "*State Name* withholding", just the state name or the state's abbreviation. Some states, like Washington and Florida, don't have state income tax. Jealous? It could be worse; some cities, like New York City, have an income tax. These will often be written as "*City Name* tax" or "*City Abbreviation* tax".
Some states have additional taxes, such as California's state disability insurance, which is commonly referred to as SDI or CA SDI on your pay stub. Each state has different laws, so check with your HR department or your state's website to see if you have any state-specific taxes.
There are certain special paycheck deductions that are allowed to be taken out of your pay prior to calculating your taxes. Some examples include:
- Dental insurance
- Medical insurance
- Vision insurance
- Health savings account deductions (HSAs)
- Certain retirement plan deductions (401(k)s, 403(b)s, thrift savings plans, etc.)
While it may hurt to see these on your pay stub, keep in mind that it's better for you to pay for these with pre-tax dollars than post-tax dollars.
Most other paycheck deductions you may have are taken out after taxes are calculated. Some examples include:
- Roth 401(k) deductions
- Union dues paid
- Court ordered garnishments (We won't ask.)
Employer Paid Benefits
Some employers like to list the benefits that they pay for on your behalf. If the employer pays for some of your benefits, these won't be deducted from your gross pay to arrive at your net pay. Examples of this include:
- Employer 401(k) match
- Employer portion of health/dental/vision insurance benefits
- Employer paid disability coverage
Some of these benefits may add to your taxable income. If so, they are normally notated with an asterisk or some other way. While this won't change your gross to net pay calculation, it will affect how your federal taxable wages are calculated.
Federal Taxable Wages
Federal taxable wages are often shown on your paycheck and can be calculated with the following formula:
Gross wages - before tax deductions + any taxable employer paid benefits = Federal taxable wages
Federal taxable wages are the basis for your federal tax withholding and can be very useful for tax planning.
Paid Time Off or Vacation Bank
The last major category on most paychecks is a paid time off (PTO) or vacation bank. Some companies will simply show the number of hours you have accumulated while others will show how much you earn each period, how much you have used and how much you have left.
Every employer has a different pay stub, but the above covers most of what can show up in a typical stub. However, due to the variety of state laws and the enormous number of companies that exist, this guide is not able to cover every item. You can use a search engine to try to answer any outstanding pay stub questions you may have, but don't be afraid to ask your HR department for an explanation. After all, it is your money ... or it would be if the company didn't take it away!
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