Deconstructing Your Paycheck

For most of us, getting a paycheck means one thing – money in the bank! But have you ever wondered why the amount you take home is so much less than what you thought you earned? If you’re just starting your first real job, this can be an especially frustrating experience. The answers lie in that other part of your paycheck—the paycheck stub (also known as the explanation statement). - Understanding Your Paycheck Stub

While format and appearance of paycheck stubs vary widely, there are some elements that every employer must include by law, even if your paycheck is directly deposited into your bank account:

1. Gross Pay

This is the total amount of money (income) you earned during a particular pay period, typically two weeks or a month. To calculate your gross pay for the pay period, simply multiply your hourly rate by the number of hours worked. In some cases hourly rates may be different—for instance when you get paid at a higher rate for overtime or for working on a holiday.

2. Net Pay

This figure represents the actual amount of money you take home after all withholdings and other deductions have been taken out.

3. Federal Tax

When you were hired you were asked to fill out a W-4 form to determine how much should be taken out of each of your paychecks to cover any federal taxes you will owe when tax time rolls around—this is your federal income tax withholding.

4. State Tax

Most states require that you pay state tax on your income. If you’re in a state with a state income, that amount is deducted from your paycheck to cover any taxes you may owe to the state when your tax return is filed.

5. Local Tax

Although rare, some cities, counties and/or school districts may also have an income tax, so you might see a deduction for those taxes as well.

6. Social Security (FICA)

The federal government requires every employee to have a certain percentage of their paycheck withheld for Social Security purposes. For 2015, the Social Security tax is 6.2 percent.

7. Medicare

Medicare is the nation’s health program for the elderly and disabled. Medicare withholdings are mandatory and represent a deduction of 1.45 percent on your paycheck.

8. Year-to-date (for pay and deductions)

The year-to-date fields on your paycheck stub show how much you have paid toward a particular withholding at any point in the calendar year. These figures can be useful when making sure you have been withholding enough for taxes, as well as for general budgeting of your monthly expenses.

Optional Deductions

In addition to mandatory deductions, you may also have optional or voluntary deductions for things like:

  • Insurance Premiums: Monthly payments for insurance such as health (medical and dental) and life insurance.
  • Retirement Plan Contributions: Plans such as 401(k) or 403(b) retirement savings plans.
  • Leave Time: Including vacation hours or sick hours. Most employers will detail how many hours have been used to date, and how many hours are remaining for the calendar year.
  • Flexible Spending and/or Health Savings Accounts for medical co-payments and other expenses.

If you find errors on your paycheck stub or have questions about the amount being taken out, be sure to contact your company’s human resources department. - Deconstructing Your Paycheck

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