How to Read Your Paycheck

If you’re one of the millions of people who receive a paycheck, you may not pay much attention to the paystub.

A paystub, which is simply the details relating to that pay period’s compensation, benefits, and deductions, actually holds quite a bit of valuable information. Most employees, however, fail to ever look at their paystubs to see what goes in their wallets (or bank accounts) versus what is withheld.

The information included in a paystub is important because it shows you where your earnings are going each pay period. Mandatory deductions, like taxes, benefit payments, and retirement savings are all found on a paystub, along with year-to-date earnings and deduction amounts.

Here, we examine the important information found on a paystub and explain how to better understand your paycheck.

Taxable Earnings and Net Pay

Typically, the most important section on a paystub is the information at the bottom – the final amount you receive as either a check or direct deposit. However, a paystub also provides helpful details about taxable earnings.

This is the amount an employee earns based on hours put in on the job or salary paid for that pay period, before taxes are withheld. The taxable earnings portion of a paystub is rarely the same amount received as income each pay period, but it is important information.

On the opposite end of a paystub is net pay, or the amount of money received after all deductions are withheld. Every employee likely has different withholdings on their paystub, but common subtractions include taxes, both state and federal (discussed below), contributions to retirement plans, and the employee’s portion of benefit premiums, such as life insurance or disability insurance payments.

Regardless of the deductions unique to each employee, net pay is the amount deposited or cashed as income each pay period.

Relevant Taxes

Several different types of taxes impact a paycheck. Ultimately, they show up as individual line items on a paystub. The following are the most relevant taxes that are deducted from your taxable earnings:

• Federal taxes – the amount of money paid to the federal government on your behalf for income taxes throughout the year. The amount varies depending on marital status, total earnings, and number of allowances claimed.
• State taxes – the amount of earnings withheld for state taxes. The amount is calculated similarly to federal taxes, but it is generally much lower.
• Social Security – this is the amount taken from earnings to help fund the Social Security program through the federal government. All workers pay social security tax on their earnings, up to a certain point.
• Medicare – similar to Social Security, Medicare taxes are also withheld from earnings, but these dollars are used to fund the Medicare program that offers health insurance to older and retired individuals.

Both Social Security and Medicare taxes may be listed together on your paystub, under FICA (Federal Insurance Contributions Act), or as separate line items.

Other Subtractions or Deductions

In addition to common and required tax withholding, your paystub may also include other subtractions and deductions. Again, these vary from employee to employee, but some standard deductions include money withheld for employer-sponsored retirement plan contributions, such as a 401(k) or a 403(b), and Health Savings Account or Flexible Spending Account (HSA or FSA) contributions.

Some employees may also have subtractions for extra benefits not paid for by the company, like supplemental life insurance benefits or short- or long-term disability insurance coverage. Other deductions may include pension contributions, childcare payments, or other elected benefits selected by a specific employee.

The Importance of Saving and Securing Your Pay Stub

Paystubs may seem like just an extra piece of paper every few weeks, but it is helpful for employees to hang on to paystubs throughout the year.

Having paystubs handy can make it easier to account for taxable earnings at tax time since the total amount of income from that employer is listed clearly. If for some reason you do not receive a W-2 in time to file taxes, paystubs may be used as an alternative or a supplement for tax filing.

Don’t worry, you do not need to hang on to all paystubs for the years. Even having one for each month, quarter, or the last one for the year is beneficial when tax season comes around.

Additionally, if there are any issues with your taxable earnings or net pay throughout the year, having paystubs can be helpful. This information can easily be shared with your human resources or compensation department to shore up any discrepancies. While they should have records of this information, having your own documentation is always an advantage.

Finally, hanging on to paystubs is helpful in the fight against identity theft, as most have personal information like your full name, date of birth, employer information, and earning details. If you do not want to keep the paper copies, be sure to destroy them fully through shredding.

Bottom Line

Paystubs can be a little confusing, but they hold valuable information about your taxable earnings and net pay. In addition, paystubs clearly show what is being subtracted from your earnings each pay period for benefits, retirement savings, and insurance.

Keeping paystubs until tax filing season can be beneficial if a W-2 is delayed, and they can be used for clearing up any pay differences that occur. Once you understand what’s listed on your paycheck, be sure to keep it in a safe place or shred it.