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Thanks to the invention of direct deposit, many people never see their physical paycheck these days. And while it may be easier to have your paychecks directly deposited into your bank account than to deal with a paper check, you still need to check your paycheck stub regularly. Regularly reviewing your paycheck helps you catch inadvertent—or even purposeful—errors in your pay. Understanding your paycheck and all the notations that go along with it is critical to managing your money and protecting your income.
The first step in reading your paychecks involves becoming familiar with the standard financial and tax information that appears on them. Here’s what you need to know about how to read your paycheck.
A pay stub generally includes the following information.
pay is the total amount of money that you earned that pay period before taxes
or any other deductions are taken out. This will include your hourly pay or
salary, as well as any overtime pay or bonuses. If you earn $15 an hour and
worked 30 hours, your gross pay will be $450.
section will often include your gross pay for this paycheck, as well as your
gross pay for the year to date (often marked as YTD).
section is going to be one of the most confusing sections because there are so
many different types of taxes to be accounted for. Your pay stub will generally
indicate how much was taken out in that specific check as well as how much has
been taken out so far that year.
Here are the basics you need to know about the tax deductions on your paystub.
The federal government gets a percentage of any income
earned by its citizens. That’s what your income tax is.
Your employer uses several pieces of information, including how much you make
on average and how many dependents you said you have on your W-4, to estimate
your federal tax liability. The estimated amount is divided by the number of
pay periods you’ll have each year and that amount is deducted from your
The money deducted for federal withholding tax is sent by
your employer to the federal government. At the end of the year, if the amount
withheld was more than your actual federal tax liability, you get a refund. If
it was less than your actual federal tax liability, you owe taxes to the IRS.
You can change the amount that’s take out of each paycheck
for federal withholding. It’s based in part on how many dependents you report
on form W-4 to your employer. Reporting more dependents reduces how much is
taken out of your check. Reporting fewer dependents increases how much is taken
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. It shows up as a deduction on a separate line.
FICA stands for Federal
Insurance Contributions Act. It’s the law that requires every
person who works to contribute to Social Security and Medicare funds. If you
see FICA on your paycheck stub, it is a deduction for these two federal
programs. Some paycheck stubs break out the deductions and show you how you’re
paying for both Medicare and Social Security.
not done with the paycheck deductions yet. In addition to taxes, you’ll likely
be paying for insurance accounts and other deductions.
If you signed up for medical, dental or life insurance
through your employer, you may see relevant deductions on your paycheck. Your
employer might pay part of the premiums and require you to pay the rest. Your
portion is taken out of your paycheck before
taxes are calculated, which means you don’t pay taxes on these deductions.
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
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.
Contributions to retirement savings plans such as a
401K or IRA
plan are also 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. Setting up retirement savings accounts lets you put
money away for the future while saving on tax payments today.
Finally, we get to the real reason you were checking your
paystub—the amount of money that actually ends up in your pocket. Your net pay
is your gross pay minus all the deductions.
This lets you track how much money you’re making and how
much money you’re actually taking home after taxes and other deductions
throughout the year. You can use this information to build a spending plan, work
on reducing your debts or start saving for the future.
It’s important to stay on top of the information on
your paycheck. 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 and then have to pay for that
mistake yourself. If your employer isn’t taking out enough taxes, for example,
you can owe all that money at the end of the year.
Be sure to check that the information on your last pay
stub of the year matches the information on your W-2 form. Your W-2 form
details your wages and taxes paid for the year and is what you use to complete
your income tax returns.
It’s also a good idea to spot check your pay regularly. If
you get paid hourly, keep track of how many hours you worked. Check to ensure
that you’re getting paid for all of the time you worked, as clerical errors can
and do happen.
Whether you get a hard copy in an envelope at work or
you have to log in to a secure payroll system, take a few minutes each pay
cycle to peruse your check stub. If anything looks out of place, reach out to
your employer for assistance. And while you’re looking at your paycheck stub,
take a few moments to consider financial matters, such as budgeting
or savings, to support financial stability for you and your family. You can
even choose to have part of your check direct deposited into your savings
account while the rest goes to checking.
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