Anyone who receives a paycheck from an employer should understand the information included on their pay whereabouts and review it regularly. Why? It is important to make sure that you are not only getting the money you are entitled to but are also paying the right amount in taxes. With the growing popularity of direct deposit, fewer people are getting a physical paycheck, which makes checking this information all the more necessary. Here are the key terms and figures on your salary base that you should be familiar with.
- Understanding your pay stub information is important for managing your money, but few people check it regularly.
- Your salary base consists of three main parts: how much you are being paid, the taxes you are paying, and any other deductions that are being made.
- Of these classes, deductions related to taxes (especially FICA) are generally the most confusing.
- Other common deductibles are for different types of insurance, such as life, medical and dental, and retirement plans.
The amount being paid to you for the current pay period—whether it’s weekly, biweekly, twice monthly, or monthly—usually comes first on your pay base and is the simplest figure to understand.
What you’ll see in this section depends on whether you’re a salaried or 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 can also check overtime hours. If you earn an annual salary, you’ll see your salary and possibly bonuses for the pay period.
What appears in this section will depend on your employer’s payroll software and how pay stubs are configured, but generally, there are three figures to pay attention to:
- total earnings. This is the amount that is paid to you before any taxes or deductions are taken out.
- YTD Gross. YTD stands for “Year to date” and is a cumulative figure that reflects everything paid to you since the beginning of the year.
- Total payment. This is why most people look at their paychecks. This is the amount you will actually receive from this paycheck.
Another part of your paycheck relates to the taxes you paid. This is often the most complicated part of the pay stub as different people pay different types of taxes. 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 taxes that will typically appear on any pay stub.
federal income tax
The principle behind federal income tax is that the government withholds a certain percentage of the money you earn in a year. However, it can be extremely difficult for any individual to calculate that percentage.
The basic calculation is this: Your employer reports your annual salary plus the number of dependents you report to the federal government on your W-4 form. The Internal Revenue Service (IRS) then estimates how much federal income tax you should pay for a given year and divides it by the number of paychecks you will receive (usually 12, 24, or 26). They will then deduct this amount from each paycheck. The same process applies to hourly employees — if you’re paid hourly, your employer will estimate your monthly income, and you’ll have a percentage of your pay withheld for federal income tax.
Sometimes, the amount of federal income tax deducted from your income may be too high or too little. For example, it could be due to a change in job or the birth of a child. If your circumstances change, you should notify the IRS or your company’s human resources (HR) department as soon as possible. If you paid too much tax, they will calculate the amount you owe and pay you a refund.
State and Local Taxes (SALT)
You can also view state taxes deducted from your paycheck. State tax rates vary significantly from state to state; Some states, such as Florida and Texas, do not have a state income tax. If you need to pay state taxes, they are calculated in the same way as federal income taxes.
Some areas levy income tax. do nothing. If your city levies income tax, you will likely have an amount withheld from each paycheck with “local” or the name of your locality. You’ll typically pay the same amount each pay period for both state and local income taxes, as long as the amount you earn remains the same.
The Federal Insurance Contribution Act (FICA) states that every taxpayer in the US must contribute to two programs: Social Security and Medicare. If you see “FICA” on your salary basis, this is the amount you are contributing to these funds. Some pay stubs will break your contributions into 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:
- Each person contributes 6.2% of their gross income directly to the Social Security Fund, and their employer then pays 6.2%. If you are self-employed, you will have to pay both parts. There is a limit to what part of your income is subject to this tax; In 2021, that’s the first $142,800 of earnings.
- You must also pay a portion of your pay to Medicare. To this program, each employee contributes 1.45% of their gross income (there is no income limit for this tax), and each employer pays an additional 1.45%. Just like with Social Security, if you’re self-employed, you’ll need to pay both parts.
If you are self-employed, you will have to pay a self-employment tax of 15.3%. This figure is derived from FICA taxes—12.4% for Social Security and 2.9% for Medicare.
These three types of taxes—federal income tax, state and local taxes, and FICA—appear on the vast majority of paychecks. However, they are the only tax that can show up on your paychecks.
For example, if you have invested in a company you work for or own the company’s stock, you may be taxed on your investment income. Taxes related to investment loans may also appear here.
Due to such variations, it is difficult to give full details of what everyone’s salary whereabouts will be visible. Therefore, it’s important to research every obscure word that appears on your stub to make sure you understand its meaning and why it’s there. If you have questions about any of the terms, the best place to start is with your human resources department. The IRS has also created a glossary of tax terms to help.
Most paychecks will also include several other deductions — on top of the taxes you’ll be paying — that will further reduce your take-home pay. These can be included in the accompanying section of your taxes. Just like with your taxes, it’s impossible to detail them all. But you should understand every deduction listed on your paycheck. If any aspect is unclear, it is always best to consult with your employer. Here are the most common:
If you have insurance provided by your employer, your insurance contribution will appear at each pay base. Sometimes an entry may be labeled “pretax,” which indicates that you are paying for that insurance before it is taxed and will not have to pay tax on that amount. The words 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 type of insurance you’re 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 set aside money for qualified medical expenses. HSAs are designed for people who have a