Understanding Your Paycheck: 4 Important Parts of Your Paycheck Stub

Payday is undoubtedly the best day of the week.

14:22 10 June 2020

If you need help understanding your paycheck, here are 4 important parts of your paycheck stub you should know.

 

Payday is something that virtually every employee looks forward to. After all, it's the chance to catch up on bills, make new purchases, or invest in your future.

 

But not everyone knows what the different parts of a paystub mean (or how to recognize them).

 

Not sure where to start? Don't worry, we’ve got you covered.

 

Let's take a look at everything you need to know about understanding your

 

1. Taxes

 

Although the taxes section of your paystub can seem confusing at first, it’s one of the most important to understand.

 

In general, you’ll find that your paystub includes both how much money in taxes was taken out for that particular check as well as how much you’ve paid in taxes for the entire year.

 

But there isn't just one large amount that's taken out for a single tax. There are multiple types of taxes that all add up to the amount you’ll see deducted.

 

Let’s take a moment to explore them.

 

Federal Income Tax

 

Every citizen in the United States has a certain amount taken from their check for federal income taxes. In order to estimate your federal tax liability, your employer considers factors like your average salary or wages, the number of dependents you have, etc.

 

This number is divided by the number of payments that you’ll receive within a given year in order to determine the amount that needs to be taken out of each check.

 

This money is then sent to the federal government by your employer on your behalf. At the end of the tax year, one of two things may occur:

 

 

A common example of overpaying occurs if you have a child halfway through the year. This would increase your number dependents, thus reducing your federal income tax obligation for the remainder of the tax year.

 

FICA

 

This term stands for the Federal Insurance Contributions Act. Put simply, it’s a law that declares anyone who receives income must contribute to Social Security and Medicare funding.

 

For typical employees, this means you’ll have 6.2% of your income taken out in order to contribute to the Social Security fund. You'll also have an additional 1.45% taken out for Medicare.

 

State Tax

 

Not all states have their own tax. If yours does, though, you’ll find how much is deducted within the same section of your paystub.

 

If you do have to pay state tax, be aware of this when creating your budget based on your income.

 

2. Deductions

These are similar to taxes, though they benefit you more directly and don’t go straight to the government.

 

Types of deductions will vary from employee to employee, but there is a handful that is relatively common.

 

These can include:

 

Keep in mind, though, that many of these deductions are optional. For example, not everyone prefers to have money taken from their paycheck and put into a health savings account.

 

If you feel your deductions are higher than they should be, you can discuss your potential options with your employer.

 

3. Gross Pay

 

This amount refers to the total income that you’ve made before any deductions or taxes were taken out. It will be a cumulative number that includes your salary/wages, overtime pay, and any bonuses you may have received.

 

In general, you’ll also find that the section includes both your total pay for the particular check and your total pay that you’ve received for the current year.

 

4. Net Pay

 

After all of the necessary money has been deducted from your check, you’ll be left with your net pay. This is the amount that you’ll actually be able to place into your bank account.

 

As you may expect, this number is likely to be significantly less than your gross pay. So, it’s essential that you budget based on your net pay and not what your salary is on paper.

 

For example, an individual could hold a project management position that’s marketed as having a $65,000 annual salary. After federal taxes, state taxes, and deductions, the net pay ends up being significantly less than $60,000.

 

This amount could mean the difference between putting a sufficient down payment on a home, having money saved up for an emergency, etc.

 

You can use a check stub creator to input different numbers and see what your deductions and taxes would be on them.

 

Why Is This Information Important?

 

Unfortunately, your paycheck’s numbers will have a strong influence on your lifestyle. They’re also not immune to human error.

 

Paycheck issues are often easiest to fix early on in the process. If you notice that your numbers are wrong six months after the error has occurred, you may encounter issues resolving it.

 

This is especially true if the error has occurred on every paycheck since then.

 

Having this level of vigilance is even more important for hourly workers. Every now and then, take the time to calculate what your gross pay should be based on the number of hours you’ve worked.

 

Sometimes, the number provided is less than what you’re supposed to be owed.

 

As long as you keep an eye on things, you’ll be able to handle any concerns as soon as possible.

 

Understanding Your Paycheck Can Seem Difficult

 

But it doesn't have to be.

 

With the above information about understanding your paycheck in mind, you'll be well on your way toward putting your mind at ease regarding your income.

 

Want to learn more lifestyle tips that can help you out in the future? Be sure to check out the rest of our blog.