Understanding How To Read Your Paycheck Stub

Understanding How To Read Your Paycheck Stub

Most employees receive a paycheck twice a month, either in paper form or by electronic deposit. Either way, each paycheck should be accompanied by a pay stub. This stub houses many deductions and tax information that you should be paying attention to. If you don’t, it’s likely you may be losing money and not even know it. 

We recommend getting out your pay stub now or using a pay stub generator to get a working template so you can follow along below. 

The Components Of Your Pay Stub 

Each pay stub contains the following sections:

  • Taxable Earnings
  • Gross Pay For The Pay Period
  • Net Pay For The Pay Period
  • Withholdings

Image result for Your PaycheckIt’s likely you are familiar with the first three components, as they are pretty straight forward. However, many people tend to be unfamiliar with the last component. Let’s take a closer look at what that entails. 

Withholdings 

The withholdings section on your pay stub it probably not the most appealing section, however, it’s important you understand what’s in it. Withholdings are payments taken out of your paycheck for taxes, social security, medicare, and other voluntary deductions. 

Federal Income Tax 

The Federal Government requires each employee to submit a portion of their paycheck to be withheld for their federal income taxes. The amount of money that gets withheld depends on the employee’s income, number of dependents, and allowances taken. 

It’s important to realize that the more money that is taken out for federal income taxes on your paycheck, the more likely you are to receive an income tax return in April. The smaller the amount taken out, the more likely you are to owe the Federal Government money for taxes. 

State And Local Income Tax 

Many states require that a portion of your paycheck be withheld for state and local taxes. This amount varies per state and city, municipality, or township. Certain states may or may not require this contribution. 

Social Security Tax 

Every employee is required by law to contribute a portion of their paycheck to the Social Security System. Throughout the entire year, employees must contribute 6.2 percent of their gross income to pay social security tax. 

Medicare 

Another mandated tax from the Federal Government is Medicare. This equates to 1.45 percent of an employee’s gross income each year. Medicare is a government insurance plan for persons with certain disabilities and those over the age of 65. 

Voluntary Deductions 

The deductions listed above are mandatory for every employee in the United States. This section, however, is voluntary based on the employee’s requests. These deductions include retirement savings plans, insurance, flexible spending accounts, and health savings accounts. All of these require you to give your employer permission to have these deductions withheld from your paycheck. 

When you look over your pay stub, take notice of all these components we talked about. You want to ensure that the right percentage of money is withheld for each purpose. If you notice a discrepancy we highly recommend contacting your human resources department to remedy the situation. Any wrong deductions you do not pay attention to will be repeated with each paycheck.

 

Category Finance

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