It might be easy to have your paychecks directly deposited into your bank account, but it’s still crucial to recognize what all those numbers and abbreviations on your pay stubs mean. If you don’t review your paycheck, you might be accidentally losing money due to an accidental, or even intentional, error.
The first step in reading your paychecks involves becoming familiar with the standard financial and tax information that appears on all of them. This information includes the deductions for federal and state taxes, Social Security, Medicare, personal insurance plans and retirement savings. Beyond these deduction codes and numbers, any other proprietary codes used on your pay stubs can be explained by your human resources department. We want to make sure you’re being paid all that you deserve: Here’s a more detailed guide on how to read your paycheck.
The Basic Building Blocks of Paychecks
A pay stub generally lists:
- Your taxable earnings.
- Your gross pay, or the total amount of money that you earned that pay period.
- Your net pay, or the amount of money that you get to take home with you. Your net pay matches the dollar amount listed on the paycheck that you’re so eager to cash.
- Withholdings for federal taxes, state taxes, Social Security and Medicare, which largely account for the difference between your taxable earnings and net pay.
- Other benefits like child care payments, retirement contributions and paid time off.
Let’s break it down further in an attempt to help you better manage your money.
Federal Income Taxes
The federal government gets a piece of your income from each and every paycheck. This piece of income is your withholding tax — a partial payment of your annual income taxes that gets sent directly to the government.
The amount of money withheld for federal taxes depends on the amount of money that you earn and the information that you gave your employer when you filled out a W-4 form, or Employee’s Withholding Allowance Certificate.
On a W-4, you can make allowances for yourself, your spouse and your dependents. For 2017, each allowance that you take exempts $4,050 from withholding.
For every allowance you take, less money gets withheld for federal taxes and more money gets added to your paycheck. Take fewer allowances, and a bigger chunk of your income will be withheld for your federal taxes.
Depending on where you live, you may or may not be required to pay a state income tax. As with federal taxes, money for state taxes is withheld from every paycheck.
The federal government requires every working American to contribute a portion of their paycheck to Social Security, a system of supplemental retirement programs established in 1935. Every worker contributes 6.2% of their gross income directly into the Social Security fund, and every employer chips in an additional 6.2% for each employee. The Social Security fund provides benefits to current Social Security recipients.
The federal government requires every working American to contribute to Medicare, a U.S. government insurance plan that provides hospital, medical and surgical benefits for Americans ages 65 and older, and for people with certain disabilities. Every worker contributes 1.45% of their gross income to Medicare and every employer pays an additional 1.45% on behalf of each employee.
These federal and state withholdings account for much of the difference between your gross income and net income. There may be other deductions as well, depending on the programs that you sign up for with your employer.
If you signed up for medical, dental or life insurance through your employer, your contributions to these plans will be deducted from your pay as well.
Retirement Savings Plans
Contributions to retirement savings plans such as a 401K plan will also be deducted from your pay. When you sign up for a 401K plan, you select a percentage of your pre-tax salary that you’d like to contribute to your retirement account.
Flexible Spending Accounts
A flexible spending plan allows you to set aside pre-tax dollars for medical expenses including health insurance copayments, deductibles and prescription drugs. Contributions to a flexible spending account are deducted from your pre-tax income.
Health Savings Accounts
A health savings account is another way to put pre-tax dollars aside in a special account for medical expenses. To be eligible for a health savings account, you’ll need to select a high-deductible health insurance plan. Contributions to a health savings account are deducted from your pre-tax income.
Why It’s Important to Track Your Deductions
Each pay stub includes year-to-date fields for each withholding category so you can track how much money you’ve paid for taxes, Social Security and Medicare throughout the year. Many employers include a similar listing for contributions to retirement savings plans and health plans. You’ll generally see these fields marked as the acronym “YTD” on your pay stubs.
It’s important to stay on top of this information. Any errors are your responsibility to find and report to your company’s human resources department. The last you thing you want is for an error to be repeated through several pay periods. If you have questions about any of the information listed on your pay stub, be sure to contact a coworker in human resources.
A pay stub also lists gross and net income to-date. So you’re able to track just how much money you’re making (your gross pay) and how much money you’re actually taking home after taxes and other deductions (your net pay) throughout the year. You can use this information to build a spending plan, work on reducing your debts or start saving for the future.
Be sure to check that the information on your last pay stub of the year matches the information on your W-2 form, which details your wages and taxes paid for the year.
Why It’s Important to Securely Store Your Pay Stubs
Certain employers include your Social Security number, name and address on pay stubs, so consider storing them in a safe place like a locked drawer, or filing cabinet. If you ever think your pay stub — and, consequently your Social Security number — was compromised, consider keeping an eye on your credit for any signs of identity theft. It’s smart to review your credit reports for free once a year at AnnualCreditReport.com, or view your free credit report snapshot on Credit.com at any time.
To learn how to get control of your finances and about budgeting best-practices, read more from our experts in our Personal Finance Learning Center.
This article has been updated. It was originally published November 4, 2016.