How to Interpret a Pay Stub

Beyond the practical purpose that any purchase serves, there are a lot of emotional reasons that people buy stuff: to feel secure and happy, to ensure others recognize them as someone worthy of acknowledgment and, perhaps, to overcompensate for an imagined fault. Unfortunately, buying stuff requires cash or at least a financial profile that suggests we're a good candidate for a loan.

So, the question becomes if cash is so important to a person's emotional well-being, why do some take little note of a pay stub, the very thing that provides evidence as to your financial status and the quality of your future retirement? In the event you need some convincing, here's some information to make you a pay stub devote.

Entries on a pay stub will include your employer's name and address, the pay period for which you're being paid, the check's number and the issuing bank. But a pay stub's primary points of interest are those items that relate to your take-home pay:

Your gross salary for the pay period: If you receive an annual salary and aren't eligible for overtime pay, your gross salary is the amount you negotiated with your boss when you accepted a job or received a raise. Your pay may also include other compensation, such as bonuses, commissions and vacation pay.

That amount divided by the number of checks you receive per year is your gross pay per pay period, be it monthly or semi-weekly. If your yearly salary is $67,000 and you receive a paycheck each week, the gross salary on your pay stub should be $1,288.46.

The regular hours you worked: If you're paid an hourly wage, your paycheck will typically show your rate of pay for regular and overtime hours. If you multiply both by the respective number of hours worked then add the two sums together, you have your gross pay.

Whether you're a salaried or hourly worker, gross pay may also include taxable benefits your employer pays, though these are generally added as a separate line item. For example, if your employer covers a gym membership or car allowance, the Internal Revenue Service will view those amounts as taxable income. Even if these benefits don't appear on your pay stub, they will appear on your W-2 at tax time.

The mandatory deductions from your wages: The items an employer must deduct from your gross pay are taxes. The tax amounts withheld depend on your earnings and the information you provide on federal form W-4.

• Federal Income Tax: Your employer withholds tax from each check in the amount of your federal income tax liability according to the information you provided in your W-4 form, such as the number of dependents you claim. The amount is also affected by the pre-tax money you spend on health insurance and other benefits. In 2020, federal rates range from 10 percent to 37 percent on earned wages.

• FICA Taxes: FICA taxes include the Social Security and Medicare taxes that fund the government income and healthcare insurance you'll receive as a senior, assuming you meet the "eligible worker" criteria. As of 2020, you pay 6.2 percent of wages up to $137,700 for Social Security. You pay 1.45 percent of wages up to $200,000 and 2.35 percent of wages greater than $200,000 for Medicare. Under FICA, both the employee and the employer each pay half of the taxes, for a total of 2.9 percent for Social Security and 12.4 percent for Medicare. 

• State and Local Income Taxes: Some states collect tax on a person's earned wages. The rates vary from state to state; Michigan collects 4.25 percent of your income; Oregon charges 4.75 percent on income from $3,600 to $124,999 and 9.9 percent on income of $125,000 and above. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don't have a state income tax.

Read More: List of States Without State Tax

The elective deductions from your wages: In addition to taxes, your employer deducts those items which you voluntarily elect to have deducted from your pay. The deduction may be a pre-tax item, such as a 401(k) and flexible spending account, which decreases your gross pay and thereby reduces your taxes. Alternatively, it may be a post-tax item, such as a voluntary retirement account, that's deducted after your income is reduced by taxes.

In most cases, an employer-provided benefit is not required by law, so the benefits vary depending on your employer and state of residence. An exception is the Affordable Care Act mandate, which requires an employer of more than 50 persons to provide health insurance.

Read More: 401(k) Retirement Rules

• 401(k) deduction: The amount of your pre-tax salary that you save for retirement is up to you, so long as it's less than $19,500 per year. According to your election, a portion of that amount is deducted from your gross pay. Your paycheck might document your employer's matching contribution as well.
• Health insurance payment: According to the Affordable Care Act, an employer with 50 or full-time employees – or the equivalent in part-time employees – must provide health insurance to 95 percent of their full-time employees. For 2017, the Kaiser Employer Survey says the average annual premium for family coverage was $18,764 with a worker contribution of $5,714.
• Transit benefits: It might be possible for you to pay for your commute with pre-tax dollars. The maximum benefit is $250 per month for qualified parking, $130 per month for transit and $20 a month for bicycle commuting.
• Wage garnishments: If your wages are garnished due to legal issues or unpaid debts, that amount appears as an elective deduction on your pay stub.    
  

Your net pay for the pay period: Your net pay is the amount that hits your bank account after taxes and other deductions.

If you get a paycheck, you're aware that a chunk of your salary never hits your bank account, rather it's diverted to the government-required things like Social Security and Medicare, and to things you control like a 401(k). But if you're one of the many who avoid looking at your pay stub each pay period, you might miss a few things.