Unless you get paid cash daily as a day laborer or something similar, you will get a paycheck. The check might be an old-fashioned paper check, although these are increasingly rare. More than likely, your pay will come via direct deposit or maybe a pay/debit card. Regardless of the form of payment, you will probably also get a paystub. (Believe it or not, some states- Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Ohio, South Dakota, and Tennessee- do not require check stubs. There is also no federal requirement for them.)
Once you know how to read it, a paystub is a valuable and powerful tool for employees. It is the best way to make sure you are getting paid the amount you expected to get paid and for all the hours you worked. You can also use a paystub to make certain that you are not overcharged for the various programs that are often deducted from a paycheck. People make mistakes, including employers. A check stub is the best way to make sure that you do not pay for other people’s mistakes. It is wise to check your check stub against any personal records you keep, such as a personal log of hours worked; do not just rely on the time clock.
Check stubs are also important because you use them as proof of income. This comes in handy when applying for loans or dealing with tax authorities.
At first sight, a paystub (or check stub) can be baffling. All of those lines, numbers, and abbreviations! But with a little guidance, and perhaps your reading glasses, paystubs are actually pretty straightforward.
Generally, a paystub will list standard identification information about both employer and employee. For employers, this includes the name of the company, the address, the EIN (or employer identification number), and so on. On the employee side of the line, you might see your name, the last four digits of your Social Security Number, home address, etc.
The check stub will also list the pay period in question. This could be weekly, bi-weekly, etc. depending on the employer.
A check stub will also include the rate of pay and number of hours worked. If you are paid hourly, the paystub will list your hourly wage and you just multiply that by the number of hours worked to get your gross pay. If you are a salaried employee, your weekly pay is generally the same no matter how many hours you worked, so the stub, by default, usually lists 40 hours as the number worked.
The first item you will find on your paystub is gross pay. This is the full amount of your pay before any deductions have been made from it. Examples of deductions are Federal Taxes, State Taxes, Medicare, FICA (or Federal Insurance Contributions Act.) You might also have deductions for health insurance and retirement accounts like 401k and Roth, pension, or 403b. Usually, your paystub will show your gross pay for the current pay period and the year-to-date.
After general information and gross pay, a check stub details the various taxes withheld from your paycheck. Again, a paystub might show the current pay period and year-to-date calculations.
FEDERAL INCOME TAX WITHHELD
This will be the next category on your check stub. The amount taken out differs depending upon how much you earn. Generally, the more you make, the higher the rate of taxation. The minimum federal income tax rate is 10%. The current maximum federal income tax rate is 37%. The number of dependents chosen on your IRS W-4 form also affects your total federal income tax.
Generally, the employer will calculate how much your annual income will be. That number will show which tax bracket (percentage to be taxed: from 10 to 37%) you are in. Multiplying your total annual income by your tax bracket rate will tell the employer your total estimated annual federal tax bill. The employer then looks at how many pay periods there will be that year and divides the total federal tax bill by the number of pay periods. The resulting sum is the amount of federal income tax to be taken out of each paycheck.
Of course, things change over the course of a year. Often, people end up being taxed at too high a rate. So, some of this tax burden may be returned to you during tax season in the form of an IRS refund. But for now, you have to pay for it.
STATE TAX WITHHELD
This tax deduction varies widely from state to state. Florida, for example, has no state income tax. While in California, the state with the highest state income tax, the state income tax rate is 13.3%. So, this will differ among various paystubs. It can also be impacted by the number of dependents you declared.
FICA, or Federal Insurance Contributions Act, taxes are the next deduction from your gross pay. FICA taxes break down into two categories: Medicare tax and Social Security tax.
Medicare is a health insurance program at the federal level, intended for people 65 years old and up. The Medicare tax rate is 1.45% of your gross income. (If your annual income is more than $200,00, you pay an additional 0.9% Medicare surtax.)
Social Security is the federal program that provides income to retired and some disabled people. The Social Security tax rate is 6.2% of your gross income.
Depending on where you live and work, you might also see deductions from your pay in the form of local taxes. Cities like Chicago and New York City have comparatively high local taxes, while many localities have no additional taxes at all.
Another possible deduction from your gross pay is for several insurance programs. Depending on your employer, you might have the opportunity or obligation to buy into various several kinds of insurance coverage. Many employers, for example, offer a health insurance option. The employer generally pays part of this cost and the rest is paid by you, the employee. You could also have vision or dental or even life insurance plans, each of which involves a deduction from your gross pay. Note that these deductions for insurance are taken out of your gross pay. The result is that you do not pay taxes on this part of your pay.
CHILD CARE DEDUCTION
You can also arrange to have expenses for child care deducted from your gross pay. Again, this avoids paying tax on whatever amount of money it is that you spend on childcare.
EXAMPLES OF OTHER DEDUCTIONS
Charitable contributions in the workplace are an increasingly common thing. Oftentimes, the company will match your contributions to select charities. Charitable contributions you make through your company will also be deducted from your paycheck. This will be reflected on your paystub.
There are other examples of where possible deductions from gross pay might come from. One is an HSA or health savings account. Employees can, through the payroll department, set aside part of their gross pay (thus, pre-tax income) to go into the HSA. These accounts are a way to save money to be used for health expenses somewhere down the line. They are a sort of rainy-day health care account. Any money earmarked for an HSA would be reflected on your paystub.
Another possible deduction is wage garnishment. According to the U.S. Department of Labor, “Wage garnishment is a legal procedure in which a person’s earnings are required by court order to be withheld by an employer for the payment of a debt such as child support.” If you have a tax debt or owe child support, it can be withheld from your gross wages. Any income that is garnished is still taxed, unlike the deductions for insurance, child care, etc.
STATE DISABILITY INSURANCE
Some states have state disability insurance. These states include California, Hawaii, New York, New Jersey, and Rhode Island. State Disability Insurance is meant to provide short-term disability coverage if something unfortunate happens. If your state requires SDI (State Disability Insurance), this will be shown on your check stub as a deduction, as well.
Sometimes you have back pay coming. This could be because of an oversight in a previous paycheck. Or maybe you got a retroactive raise that the employer needs to catch up on. In any case, on your check stub, you might see the back-pay category add something to your gross income.
On occasion, you might get a bonus, sick pay, or even vacation pay. If so, this will be listed on your paystub. Generally, it is subject to the same deductions as regular pay.
So, these are the slices taken from the gross pay pie. The amount left over, your actual paycheck or direct deposit, is called NET PAY. This is what you have been waiting, and working for. Don’t spend it all in one place!