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How to decode your pay stub

Alyssa Pry
Personal Finance Reporter

It’s payday! The first thing you’ll probably notice is a big gap between the dollar amount on your paycheck and how much actually gets deposited into your bank account. (Yes, you’ll be disappointed.) If you take a look at your pay stub, you’ll see a lot more information about your earnings and where it all goes. Here’s how to decode your pay stub so you can keep track of your hard-earned cash.

Gross pay vs. net pay

Every paycheck you receive will list how much you’ve made for each pay period, as well as your salary for the year to date, or YTD.  Your gross pay is what you earn before taxes and deductions are taken out. Obviously, this number will be larger than your net pay, which is the money you actually take home. For example, if your gross pay for the pay period is $1,500, and your deductions are $500, your net pay would be $1,000.

So what gets deducted? Where to start!

Taxes

The biggest blow to your hard-earned money is taxes. Federal tax is based on your income, and will vary on how you fill out your tax forms, like a W-4, which tells your employer how much to deduct from your paycheck to cover your taxes. If you’re unsure of how much you should be withholding on your tax forms, use a withholding calculator from the IRS.

Most states also deduct state income tax from your paycheck. If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire or Tennessee, you’re spared from shelling out for state tax, but everyone else has to pay up.

Remember, you may get some of this money back from your tax returns when you file each year.

Social Security and Medicare

Both Social Security and Medicare are automatically deducted from your paycheck each cycle: Social Security takes 6.2% of your gross pay. The money funds benefit programs for retirees, people with disabilities, and surviving spouses and children of workers who have died. More than 41 million retirees receive an average check of $1,360 per month from Social Security.

You will be able to tap into your Social Security benefits when you’re 62, but won’t be eligible for full benefits until you reach your Full Retirement Age (FRA), which is 66 for people born between 1943 and 1954, and 67 for those born in 1960 and later. 

1.45% of your paycheck goes to Medicare, a federal health insurance program for people 65 and older, and for people with disabilities.

Pre-tax deductions

If you have an employer-sponsored 401(k) plan, your contributions will be deducted from your paycheck. Currently, you’re allowed to contribute a maximum of $18,000 a year to your 410(k) account, and your employer may offer to match a percentage of your contributions.

If you have health and dental insurance through your employer, they’ll typically pay 80% of the cost of the plan. So the other 20% is deducted from your paycheck, pre-tax. Life insurance, Health Savings Account contributions, which help pay for health care expenses, and commuter assistance programs can also be deducted from your salary before taxes are factored in.

Vacation and sick pay

Your pay stub will have a tally of the amount of vacation and sick days you’ve used, and how many you have left, if you’re offered paid vacation and sick pay from your employer. Maybe it’s time to use some of your remaining days on a trip?

Remember, it’s important to understand what’s on your pay stub so you can spot any changes or errors in your income. Your pay may fluctuate week to week–some employers won’t take your deductions out for every pay period, which could affect your taxable wage and how much is taken out. Knowing everything you can about your finances is a great step to being able to budget and add to your savings.

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