Personal Finance Basics – Part 1: Reading Your Paystub

This is Part 1 in my Personal Finance Basics series.

It doesn’t get much more basic than understanding the numbers on your paystub.  It’s amazing how much valuable information is in that paystub though!

Let’s look at typical employee’s paystub to make sure we understand all of the terms.  In almost all cases, you should see “Current” and “YTD” (Year-To-Date) numbers for each item below.

Gross Pay / Earnings – The full amount the company is paying out to you in this pay period (either your hourly rate X number of hours worked in the pay period or your annual salary divided by the number of pay periods your company has in a year (usually 26 (bi-weekly pay), 24 (“bi-monthly” pay) or 12 (monthly pay)).  You may also see a breakdown of pay from different sources/types (such as regular pay and overtime pay at another rate).

Tax Witholdings – The names and abbreviations for these will vary greatly, but here’s what you should see pulled from your check by the government:

• Federal Income Tax / Fed Withholding – This is the money that goes to everything from mowing the White House lawn, to paying for medicaid (not medicare), to building aircraft carriers.  Some important things to note here:
  • Your employer will estimate your tax bracket based off your income and the W4 information you provided (filing status, allowances, additional to withhold) and withdraw from your paycheck accordingly (more allowances = more taxes withheld, less allowances = more $$ in your paycheck).
    • If you have multiple income sources (more than one job and / or your spouse works), make sure you follow the instructions to determine additional withholding amounts.  If the combination of these income sources bumps you up a few tax brackets, you could be stuck with a big bill come April 15th.
  • Your employer is not responsible for accurate withholdings or for you paying the correct amount of income tax.  If you fill out your W4 by hand correctly and the $6/hour intern inputs it incorrectly, your employer is on the hook nothing (okay, maybe some angry looks and terse language from you, but that’s it) – and you’ve got to make it right with the government on tax day (including any applicable penalties)!
• FICA (Federal Insurance Contributions Act)  = 7.65% on first $118,500 of income.  Includes:
  • OASDI/EE (Old Age, Survivor and Disability Insurance/Employee-Employer)  / Social Security = 6.2% – This is the money you pay into our Social Security program (that you hope to benefit from later!).
  • MED/EE (Medicare/Employee-Employer) Medicare = 1.45% – Pays for healthcare for those over 65 (and some other stuff…).
  • Additional Medicare tax for High-Income (HI) earners ($200K individual, $250K married) = 0.9% for incomes over threshold (meaning, if you are single and made $200,100, you would pay ninety-cents ($0.90) in Additional Medicare Tax) – More money for Medicare.
• State and local taxes – The amount you pay on on your State and Local taxes will vary greatly based on where you live:
  • In nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming) you’ll pay nothing out of your paycheck for state taxes while in California (poster-child for high taxes) you’ll pay 13.3% of your income in state taxes.
  • Fourteen states (Alabama, Arkansas, Colorado, Deleware, Iowa, Indiana, Kentucky, Maryland, Michigan, Missouri, New York, Ohio, Oregon and Pennysylvania) allow cities, counties and other districts (usually school districts) to levy additional taxes.  The amount of these taxes varies greatly – for example, St. Louis, MO has a 1% income tax; Detroit, MI taxes residents 2.5% of income and non-residents 1.25%.

Deductions – Deductions are all items, other than taxes, that your employer takes from your check before the “big reveal” of how many singles you’ll get to stuff in your pockets (or wherever you like to stuff them) this pay period.  Again, names and abbreviations on the items in this section will vary greatly.  Deductions fall into two categories:

• Pre-Tax (may be noted as Before-Tax)
  • Health, Dental and Vision Insurance Premiums (these are usually pre-tax, if they show up in the Post-Tax column, they should be deductible on your taxes at the end of the year).
  • Flexible Spending Accounts (FSA, including Dependent Care FSA) and Health Savings Accounts (HSA)
  • Tax-Deferred investments (such as 401(k) or 403(b) retirement accounts)
  • Parking Permits
• Post-Tax (may be noted as After-Tax)
  • Accident insurance (AD&D or Accidental Death and Dismemberment) – Gives you a check if you have an accident and lose a limb or eye… gives your beneficiary (probably spouse or children) a check if you accidentally end up dead.
  • Voluntary / elected / supplemental life insurance – Money your beneficiary gets if you die.
  • Voluntary / elected / supplemental short and long-term disability insurance (some folks, strangely, show this as pre-tax) – Money you get if you are unable to work due to a qualifying disability.  Short-term disability usually kicks in after 14 days and ends at 90 or 180 days; long-term kicks in where short-term leaves off and last 5-years, 10-years or until retirement (all of these specifics will vary depending on the specific policy you get from  your employer, but this information is typical and gives you the idea).

Net Pay – Finally, we get to the amount of actual cash money you get (okay, probably a direct deposit, but you get the idea).  You’ll often hear this referred to as “take-home pay.”  Your stub probably shows how this amount is divided up between your different bank accounts, if you use more than one.

Note that if you are a contractor (receive a 1099 at the end of the year rather than a W2), you will not receive a paystub with the above information (probably just a check).  You are in the ranks of the self-employed – make sure you are saving enough to cover your tax bill (and making estimated payments, if needed!).

Final note here — much of what you see above makes an appearance in the W2 your employer sends you at the end of the year when preparing your taxes.  These terms will also come up in various other ways through the personal finance conversation as you’ll see in later posts in this series.

Did I miss anything?  Have any strange items in your paystub you can’t figure out?  Concerned about your withholdings?  Comment below!