How to Make Sense of Your Pay Stub

Anyone who receives a paycheck from an employer should understand the information included on their pay stub and review it regularly. Why? It’s important to make sure that you are not only receiving the money you are entitled to but also paying the correct amount in taxes. With the increasing popularity of direct deposit, fewer people are receiving a physical paycheck, which makes checking this information even more necessary. Here are the major terms and figures on your pay stub with which you should be familiar.

Key Takeaways

Understanding the information on your pay stub is crucial to managing your money, but few people check it regularly.
Your pay stub contains three main sections: how much you are being paid, the taxes you are paying, and any other deductions that are being made.
Of these sections, the deductions relating to taxes (particularly FICA) are generally the most confusing.
Other common deductions are for different types of insurance, such as life, medical, and dental, and retirement plans.

Your Pay

The amount you are being paid for the current pay period—whether it’s weekly, biweekly, twice monthly, or monthly—generally comes first on your pay stub and is the most straightforward figure to understand.

What you’ll likely see in this section depends on whether you are a salaried or an hourly worker. If you work by the hour, your hourly rate and the number of hours you worked for the pay period will be listed. You may also see overtime hours. If you earn an annual salary, you’ll see your salary for the pay period and possibly bonuses.

What appears in this section will depend on your employer’s payroll software and how the pay stubs are configured, but typically, there are three figures to pay attention to:

Gross earnings. This is the amount you are paid before any taxes or deductions are taken out.
YTD gross. YTD stands for “year to date” and is a cumulative figure that reflects everything you have been paid since the start of the year.
Net pay. This is why most people look at their paycheck. It is the amount that you will actually receive with this paycheck.

Your Taxes

Another section of your paycheck relates to the taxes you have paid. This is often the most complicated part of a pay stub because of the variety of taxes that different people have to pay. The amount of taxes you pay depends largely on where you live, how many dependents you have, and where you are paid. (Different states have different tax rates, so your taxes may be affected if your place of employment is not in the same state as your residence.)

There are three main types of tax that will generally appear on any pay stub.

Federal Income Taxes

The principle behind federal income tax is that the government withholds a certain percentage of the money you earn in a year. However, that percentage can be fiendishly difficult to calculate for any individual.

The basic calculation is this: Your employer reports your annual salary as well as the number of dependents you report on your W-4 form to the federal government. The Internal Revenue Service (IRS) then works out an estimate of how much federal income tax you should pay for a given year and divides this by the number of paychecks you will receive (generally 12, 24, or 26). They will then deduct this amount from each paycheck. The same process applies to hourly employees—if you are paid hourly, your employer will estimate your monthly income, and you will have a percentage of your pay withheld for federal income tax.

Sometimes, the amount of federal income tax deducted from your earnings may be too high or too low. This could be due to a job change or the birth of a child, for instance. If your circumstances change, then you should inform the IRS or your company’s human resources (HR) department as soon as possible. If you have paid too much tax, they will calculate the amount you are due and pay you a refund.

State and Local Taxes (SALT)

You may also see state taxes deducted from your paycheck. State tax rates vary significantly from state to state; some states, like Florida and Texas, don’t have a state income tax. If you need to pay state taxes, they are calculated in much the same way as federal income taxes.

Some localities levy an income tax. Some do not. If your city imposes an income tax, then you will likely have an amount withdrawn from each paycheck labeled “local” or with the name of your locality. You will generally pay the same amount each pay period for both state and local income taxes, so long as the amount you earn remains the same.

FICA

The Federal Insurance Contributions Act (FICA) mandates that every taxpayer in the U.S. must contribute to two programs: Social Security and Medicare. If you see “FICA” on your pay stub, this is the amount you are contributing to these funds. Some pay stubs will break down your contribution to the two funds separately, and some will not.

The amount you are required to contribute to FICA is defined as a percentage of your income. It works as follows:

Everybody contributes 6.2% of their gross income directly into the Social Security fund, and their employer then pays another 6.2%. If you’re self-employed, then you will owe both portions. There’s a cap on how much of your income is subject to this tax; in 2021, it’s the first $142,800 of earnings.
You must also contribute a portion of your paycheck to Medicare. For this program, every worker contributes 1.45% of their gross income (there’s no income cap for this tax), and every employer pays an additional 1.45%. Just as with Social Security, you must pay both portions if you’re self-employed.

If you’re self-employed, then you have to pay a self-employment tax of 15.3%. This figure derives from FICA taxes—12.4% for Social Security and 2.9% for Medicare.

Other Taxes

These three types of taxes—federal income tax, state and local taxes, and FICA—appear on the vast majority of paychecks. However, they are far from the only taxes that can appear on your paycheck.

For example, if you have made investments in the company you work for or own company stock, you might be taxed for your investment income. Taxes relating to investment loans might appear here, too.

Because of variations like these, it’s difficult to give a complete overview of what will appear on everyone’s pay stub. Therefore, it’s important to research every obscure term that appears on your stub to make sure you understand what it means and why it’s there. If you have questions about any terms, the best place to start is with your HR department. The IRS has also created a glossary of tax terms to help out.

Other Deductions

Most paychecks will also contain a number of other deductions—on top of the taxes you are paying—that will further reduce your take-home pay. These may be included in the section with your taxes. Just as with your taxes, it’s impossible to detail all of them. But you should understand each deduction listed on your paycheck. If any aspect is unclear, it’s always best to consult with your employer. Here are the most common ones:

Insurance

If you have insurance provided by your employer, your insurance contributions will show up on each pay stub. Sometimes an entry may be labeled “pretax,” which indicates that you are paying for that insurance before you are taxed and won’t have to pay tax on that amount. Terms marked “insurance” on your paycheck can refer to a wide range of products—medical, dental, life, disability, etc.—and it’s important to know what types of insurance you are paying for.

Flexible Spending Accounts and Health Savings Accounts

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are programs designed to allow people with health insurance to put money aside for qualified medical expenses. HSAs are designed for those who have a high-deductible health plan (HDHP). The money you put into an HSA or FSA can be used tax-free to pay for certain out-of-pocket healthcare costs as they arise. If you are enrolled in one of these programs, your contributions to your account will also show up on your paycheck.

Flexible spending accounts can also be set up as dependent care FSAs to allow for tax-free withdrawals for eligible childcare expenses. Your pay stub may reflect these deductions from your pay.

Retirement Savings Plans

A very common pay stub deduction is a contribution to a retirement plan. These can include traditional IRAs, Roth IRAs, SEP IRAs, and 401(k)s. When you sign up for a retirement plan, you must choose a percentage of your pre-tax salary that you would like to contribute. This amount is also deducted from your pay.

Special Considerations: Social Security Tax Deferral

You might have noticed an increase in take-home pay starting September 1, 2020, through December 31, 2020. It was due to an order issued by then-President Donald Trump authorizing employers to defer Social Security withholding during that period if your biweekly gross earnings were less than $4,000.

According to Trump’s original order, the deferred amount had to be repaid by April 30, 2021. However, due to the Consolidated Appropriations Act (CAA), 2021, the due date for repaying the deferred Social Security taxes is December 31, 2021.

If you are unsure whether your employer deferred payment on your behalf, check with your human resources department and, if you are subject to pay back, make sure that proper deductions are being made and reflected on your pay stub.

Social Security Cost-of-Living-Adjustment

According to the Social Security Administration, beneficiaries of Social Security and Supplemental Security Income (SSI) will receive a 5.9% cost-of-living adjustment (COLA) in 2022.

Your specific monthly payment will depend on your situation, including whether you’re a retired couple, a widow, or have children. However, on average, a retired worker that got paid $1,565 per month before the COLA will get paid $1,657 monthly in 2022 after the COLA.

The Bottom Line

Pay stubs in the U.S. vary according to how they are generated, but most contain a number of key features, including your pay, taxes, and deductions. It’s important to ensure that this information is correct, but not enough people make an effort to do so. Doing your own calculations—or verifying the accuracy of those performed by the IRS—can save you (or your employer) from making a costly mistake.

Don’t let direct deposit deter you. If you want to see your pay stubs, your employer can generate them and email them to you, give them to you directly, or make them available on a secure company website for employees. Ask about these options if you don’t currently receive a pay stub.