What usually comes with your paycheck is your earnings minus a whole bunch of deductions. This is why you need to understand how pay stub deductions work.
As a matter of fact, getting your paycheck each week might leave you feeling a little disappointed. I mean, you never end up getting the amount of money you earned.
Instead, you get your earnings minus a whole bunch of deductions. At times, you may even be asking yourself what are all these deductions?
If you’ve ever had these thoughts and have trouble understanding pay stub deductions, you’re in the right place. Here is an explanation of how to read and understand everything you find on your pay stubs.
A Pay Stub is a summary
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The pay stub you receive each payday is a summary of your earnings and withholdings. The first thing you might notice on it is your gross pay. Gross pay refers to the amount of money your company paid you for your work.
This amount might be a salary amount, hourly payment, or another type of method. Usually, the gross pay always tells you the amount you earned during a stated pay period.
The gross pay is not the amount you receive from working, though. Instead, you receive the amount listed as your net pay.
Net pay is the amount of your gross pay minus all the different withholdings and deductions your employer took from your earnings. The net pay is equal to the amount of your paycheck. Net pay is always less than gross pay.
Your employer must legally withhold taxes
So, what are all these withholdings that your employer takes from your paychecks? Well, many of them are tax withholdings.
Your employer has the legal responsibility to hold back some of your income for taxes. Here are some of the taxes you will likely pay from each check:
- FICA: FICA taxes pay for the Social Security program and Medicare. You must pay into these programs whether you utilize them in the future or not.
- Federal: A portion of your income goes to the federal government to pay for services such as government payroll and other federally funded programs.
- State and county: You must also pay a portion of your income to the county you work in and the state where you live.
The amounts you pay for taxes vary by your income amount, the size of your family, and your marital status. Your employer gathers these details from a W-9 Form you fill out when the company hires you for employments.
The money your employer withholds for these taxes is not money the company keeps. Instead, your employer must send these amounts to the appropriate organizations.
SEE ALSO: Understanding Taxes for Freelancers and How to Track Income
Federal taxes go directly to the federal government. State and local taxes go to the local state where you live. When it comes to FICA taxes, your employer must not only send in these amounts withheld from your check but must also match them.
If you pay $100 in FICA taxes, your employer will pay $200 for them. Matching FICA taxes is a legal requirement, and it is a payroll tax your boss can write off at the end of the year.
It’s important to know that if you pay too much in taxes throughout the course of the year, the government will refund you the amount you overpaid.
You may voluntarily agree to other withholdings
Additionally, there are things you might voluntarily contribute money to, and these show up as deductions on your pay stub. Two excellent examples of these are health insurance premiums and 401k contributions.
Do you have employer-sponsored health insurance? If so, you probably pay a specific amount each payday for this coverage. Does your company offer a retirement plan that you can invest in?
If so, you can contribute money into this fund each payday to build your retirement savings. Any money you pay out directly from your check shows up as a deduction on your pay stub and lowers the amount you receive for your net pay.
Self-employed individuals do not always receive pay stubs, though. If you ever decide to start a business, you might want to consider using a check stub template to make pay stubs for yourself.
Having pay stubs is something you need if you ever want to apply for a loan of any kind. Pay stubs prove your income and are vital for your finances.
You might have involuntary deductions too
One other type of deduction you might see on your pay stubs falls in the category of involuntary deductions. An involuntary deduction from your paycheck is something your employer is legally required to withhold that you cannot control.
If, for example, you pay child support, your employer might have to withhold it from your check. If so, your employer would send the money withheld to the courthouse. The courthouse would then send it to the person you pay child support to.
Another example of an involuntary deduction is for wage garnishments. If you lost a lawsuit and ended up with a judgment against you, the court can garnish your wages. If this is the case, your employer would also be legally required to withhold a certain amount from your check each week to pay for this debt.
The only way to stop an involuntary deduction is through a court order. If you feel that it is a mistake, contact a lawyer or your local court to find out what you can do about it.
Other things to know about understanding Pay Stubs
In addition to the things already listed, you might find a variety of other types of details and information on your pay stubs. For example, your pay stubs will state your name, social security number, and address.
They will also indicate the dates of the pay period and your year-to-date totals for earnings, withholdings, and other deductions.
If you still have questions about understanding pay stubs, check out the rest of our website. We have a lot of informative articles on pay stubs, finance, and other related issues.
