Your first paycheck as an employed person comes with a mix of excitement and confusion. You’re making a steady income, but where’d your money go?
Remember those tax forms you filled out during your onboarding process? You signed papers you may not have understood asking about your dependents and deductions for insurance and retirement. This information impacts how much of your check is taken out before you get paid.
To understand where your money is allocated, you must read your pay stub. In this guide, we’ll explain how to read your paycheck and why you have deductions and taxes taken out.
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Looking At Your Paycheck
Whether your check is directly deposited into your bank account or on a paper slip, you have a pay stub accompanying it. You may need to log in to the company platform to access your online stub.
Once you have your paycheck and stub in front of you, you’ll see that it’s broken down into sections. These include your earnings (hours times hourly pay rate or salary), the taxes taken from your check, and other deductions, such as your HSA, insurance, and retirement. You may also see bonuses and overtime here.
Your gross income is how much you earned for that pay period. Your net is how much money you take home after deductions. You’ll also see a year-to-date total of your gross pay earned in a calendar year, which the IRS looks at when you file your taxes.
Monitoring your pay stub is essential because it ensures you’re receiving the correct pay for the hours worked. It also records benefits like how much time off you’ve accrued and used for vacation, personal, and sick leave. If you apply for a loan or to rent a home, you may need proof of employment and income. Pay stubs are the easiest and most ideal way to show you’re employed.
Paycheck Taxes
Although you’ve earned a certain amount of money, it isn’t what you bring home (your net pay). How much you net is your earned total minus deductions. While benefits like retirement and insurance are optional, everyone receives tax deductions
The amount of tax deductions depends on how many dependents you claim and whether you work full- or part-time. If you’re unsure whether you’re paying the right amount of taxes, check out this article by OJM Group.
Taxes are broken down into the following types:
- FICA: Short for Federal Insurance Contributions Act, this is the amount of federal income tax the government withholds. The amount is calculated with a formula that uses your estimated annual salary and number of dependents. If the estimated taxes paid are too low, you’ll owe more when you file annual taxes. If they’re too high, you’ll receive a refund.
- SALT: Most states and some cities have state or local taxes deducted from employee paychecks. These amounts vary but are calculated similarly to federal taxes.
State and federal taxes are estimates, but they’re taken from your paycheck as consistent amounts. This makes it easier to plan for your net pay when you budget.
Other Paycheck Deductions
The last thing to analyze in your paycheck is the pretax deductions beyond the required taxes. These are usually optional or required benefits offered by the employer.
Common deductions include:
- Retirement plans such as 401(k)s
- Health savings accounts (HSAs) and flexible spending accounts (FSAs)
- Health insurance (this may be partially paid by the employer)
If you have any wage garnishments on your pay, you’ll see that amount listed as a deduction. State-ordered child support payments are also deducted here.
When to Be Concerned About Your Paycheck
Most employers use a payroll accounting system to calculate your taxes, deductions, and earnings automatically. As long as they’ve input the base numbers correctly, everything on your paycheck should be accurate. However, there are some key details to watch for as you monitor your stubs.
First, check to ensure your name, birthdate, and Social Security number are correct. Any misspellings or transposed numbers can cause serious issues when you file your taxes.
Next, make sure your employer is withholding taxes and paying you the right rate and correct hours. Let them know of any inconsistencies or discrepancies. If the employer does not fix the issues and you’ve given them multiple chances to do so, you can contact the US Department of Labor to file a complaint.
Keep track of overtime hours and your time off. Monitor your pay stubs to ensure what is on file and what you’ve tracked match.
Conclusion
You’ve earned your paycheck, and you’re entitled to the money you deserve. But it’s up to you to understand what’s happening to your earnings and know your tax responsibilities. A financial advisor can guide you as you get familiar with budgeting, planning for the future, and managing your deductions.
