In This Article, We Are Going To Discuss 3 Tips on Reading a Pay Stub to Know Where Your Money Is Going
Ask any adult who has been working for a few years and they will share the shock of their first paycheck. The amount of money deducted from your wages feels like robbery.
3 Tips on Reading a Pay Stub to Know Where Your Money Is Going
3 Tips on Reading a Pay Stub to Know Where Your Money Is Going Listed Below
If reading a pay stub leaves you stumped, keep reading to learn the answer to three important questions:
- What is gross pay?
- What are all these deductions for?
- What is net pay?
Your hourly wages or salary are the base for computing every deduction on your pay stub.
- What is Gross Pay?
The amount of money you earn during a pay period is your gross pay. This is your hourly wage or salary, plus any overtime income or bonuses.
There will be two areas for gross pay on your pay stub. One will be for the wages earned during that pay period, and there will also be a year-to-date (YTD) amount for what you have earned during the calendar year.
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Vacation and Sick Days
If your employer offers paid vacation or sick days, these will also show separately on your pay stub. When you receive payment under any of these categories it will a separate line item for gross pay.
Many employers show both days available and days used for these categories on the paystub. If your employer’s policy is “use it or lose it” this is an excellent way to track time available to use before it expires.
- What Are All These Deductions For?
There is nothing more discouraging than seeing all your hard-earned wages going to places you don’t even know. Some deductions are mandatory by the government, others are things you may have volunteered to have withheld.
The bookkeeping for this is enough to make an employer pull their hair out. Some businesses use a paystub generator to help make sure everything is calculated properly.
Employers must follow the Federal Employers Tax Guide 2020 to make sure they deduct everything they have a legal obligation to from your payroll check.
Federal Income Taxes (FT or FWT)
The federal government collects tax based on a percentage of your income. Your employer will use information from your W-4 form to estimate your federal tax liability. The IRS has formulas to help your employer calculate the appropriate amount of money to withhold each pay period.
Your employer forwards the money withheld from your check to the IRS. At the end of the year, your W-2 will show the total amount of tax withheld for the year.
If the amount withheld is more than your tax liability you will receive a refund. If the amount withheld is less than your tax liability, you will have to pay an additional amount to the IRS.
If you owe tax at the end of the year and want a higher amount deducted from your check, you need to complete a new W4 form for your employer.
State Income Tax (ST)
The amount of state income tax withheld varies from state to state. Just like federal tax, state income tax is withheld from each paycheck. It sill be listed on a separate line on your pay stub.
Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act requires every employer to deduct Social Security and Medicare contributions from each employee.
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Some paychecks will show this as one deduction under FICA. Other pay stubs may show a separate deduction for Social Security (SS) and Medicare.
The employer and employee must make equal contributions. This means must contribute 6.2 percent of your gross wages to Social Security and 1.45 percent of your gross wages to Medicare through payroll deductions. Your employer must contribute an equal amount by matching your contribution to both Social Security and Medicare.
You may have medical, dental, or life insurance available through your employer. This usually requires you to pay an employee contribution to receive this benefit.
Your portion will be subtracted from the gross wages on your paycheck before taxes are taken. You do not pay taxes on your insurance contributions.
Flexible Spending Account
Some employers offer the option of having a flexible spending account. This account is a savings of pre-tax money that you can save for medical expenses, health insurance copays, medical deductibles, and prescription drugs. The amount is deducted prior to the tax deductions.
Health Savings Account
Similar to the flexible spending account, this allows you to save pre-tax dollars for medical expenses. To be eligible for this option you must have a high-deductible health insurance plan.
Retirement Savings Plan
Contributions made to a 401(k) or IRA are deducted from your pre-tax wages. This is based on a percentage you establish. Many employers provide you with information so you can diversify your investments to your liking.
If you work for a company where employees belong to a union, there will be union fees deducted from your paycheck. This may be done on a once-a-month basis rather than a weekly time frame.
If you have unpaid debt and have been subject to a lawsuit there may be a court order to garnish your wages. This is an amount set forth by the court and will show as a deduction on your pay stub.
Child Support and/or Alimony
When you have an obligation to pay child support or alimony many states require mandatory wage deduction for these payments. This will be listed as a separate deduction on your pay stub, most likely under the Friend of the Court (FOC).
- What is Net Pay?
The difference between your gross wages and your deductions is what constitutes your net pay. It is your take-home pay, the amount on your check, or what is sent to your bank for direct deposit.
Read Your Pay Stub
Many people throw their pay stubs in a drawer without really looking at it. You need to get into the habit of reviewing the information on your stub and checking it for accuracy.
If any errors occur you need to contact the human resources department of the company immediately for correction. This is especially important when incorrect income tax withdrawals may leave you owing large amounts of money when you file your taxes.
Reading a Pay Stub
Now that you have a better idea of how reading a pay stub on a regular basis is beneficial, make use of that information when budgeting for things like a vacation, new home, end-of-year tax obligations, or savings.
Knowledge is power. If you enjoyed learning about pays stubs and are itching for more information, check out our other blogs today!
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