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With the start of tax season quickly approaching now is the perfect time to take a good look at your pay stub. It’s more than likely been awhile since you’ve taken a good look, especially if you have direct deposit. A regular review of your pay stub can ensure accuracy, but whether it’s your first or 100th pay stub, you may not understand what all the abbreviations and deductions mean.
Here’s a breakdown of the most common payroll deductions and the basic building blocks of a paycheck.
The Basics:
A pay stub generally includes:
- Your taxable earnings.
- Your gross pay – the total amount of money you earned in that pay period.
- You net pay – the amount of money you take home.
- Withholdings – these largely account for the difference between your taxable earnings and net pay.
Federal Income Taxes:
Federal taxes are calculated as a percentage of your income. When you start a new job, you fill out a W-4 form, or an Employee’s Withholding Allowance Certificate, to indicate the percentage of your income that you would like to be withheld. If the amount is too high, you will receive a tax refund after you file your yearly taxes. If you don’t have enough withheld, you will be responsible for the paying the balance. On your W-4 form, you are given the option to make allowances for yourself, your spouse and your dependents. For every allowance that you take, less money is withheld for federal taxes and more money is added to your paycheck. The fewer allowances that you have, the more money that will be withheld for your federal taxes.
State Income Taxes:
State taxes work like federal taxes, but are paid to the government of the state that you live in. Several states, including Texas, Nevada and Florida, do not collect state income tax.
Social Security and Medicare:
You are required by the federal government to contribute to Social Security and Medicare. Social Security is a system of supplemental retirement programs established in 1935. Every worker contributes 6.2% of their gross income and every employer contributes an additional 6.2% for each employee. Medicare is a government insurance plan that provides hospital, medical and surgical benefits for Americans 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% for each employee. If you see FICA on your pay stub, it stands for a law called the Federal Insurance Contributions Act, which requires employees to contribute to Social Security and Medicare with each paycheck.
Insurance:
If you have insurance through your employer, you are required to pay a portion of the plan premium. If you have any questions or concerns about your benefits, be sure to reach out to your human resources department.
Health Savings Accounts or Flexible Spending Accounts:
A flexible spending account allows you to set aside pre-tax dollars for medical expenses. Contributions to a flexible spending account are deducted from your pre-tax income. Health savings accounts are just another way to put pre-tax dollars aside for medical expenses. To be eligible for a health savings account, you need to select a high-deductible health insurance plan. Contributions to a health savings account are deducted from your pre-tax income.
Retirement Savings:
If you participate in your company’s 401(k) or 403(b) retirement plan, the percentage of your pre-tax pay that you choose to have withheld will be taken out of each paycheck and placed into a retirement account.
A regular review of your payroll deductions can help you identify any errors and get them addressed as quickly as possible. The last thing you want is for an error to be repeated through numerous pay periods. If you notice something unusual or have questions regarding your pay stub, reach out to your human resources department.
You can find this article in its entirety at:
https://www.takechargeamerica.org/understanding-payroll-deductions/
https://www.credit.com/personal-finance/how-to-read-your-paycheck-stub/
