Understanding Your Paycheck Stub

Did you know that not everyone gets a pay stub? Whether you’re moving state and encountering one for the first time, or have recently graduated and have just earned your first paycheck, it’s important to understand the info it contains.

The Fair Standards Labor Act requires employers to keep records of how many hours an employee has worked and the amount of money he was paid. But, it does not require that employers share this information with its employees.

However, in the absence of federal law, many states have statutes pertaining to pay statements. Colorado state law, for example, requires that employers furnish employees with pay stubs at least once a month that list gross and net wages, as well as all deductions.

A paycheck stub summarizes how your total earnings were distributed.  This includes how much was paid on your behalf in taxes, how much was deducted for benefits, and the amount that was paid to you after taxes and deductions were taken.

Paycheck stubs are normally divided into 4 sections:

  • Personal and Check Information
  • Earnings
  • Deductions
  • Withholding

  1. This section shows the beginning and ending dates of the payroll and the actual pay date.
  2. This is your home address
  3. This is the information about your specific job
  4. This is your Federal and State filing status
  5. These are your current and year to date hours and earnings
  6. Federal and State current and year to date taxes withheld
  7. Before Tax Deductions
  8. After Tax Deductions
  9. Employer Paid Benefits. This is the portion of your benefits paid by your employer, not deductions from your earnings.
  10. This is the summary section of the pay stub

Personal and Check info includes your personal information, filing status (single or married), as well as the withholding number, according to your IRS form W-4.

The earnings section shows your earnings from the pay period and includes overtime.  It also shows pre-tax deductions for different employee benefits that you may receive, such as health insurance and retirement contributions.

Deductions shows additional deductions that might be taken out of your paycheck after tax, like group life or disability insurance.

Withholding is the money that your employer is required to take out of your paycheck on your behalf. This includes federal and state income tax payments, Social Security, Unemployment Insurance, and Worker’s Comp.

 

Common Paycheck Deductions Explained

These federal and state withholdings account for much of the difference between your gross income and net income. There may be other deductions as well, depending on the programs that you sign up for with your employer.

Federal Income Taxes

The federal government is entitled to a portion of your income from every paycheck. This known as your withholding tax — a partial payment of your annual income taxes that gets sent directly to the government.

The amount of money withheld for federal taxes depends on the amount of money that you earn and the information that you gave your employer when you filled out a W-4 form, or Employee’s Withholding Allowance Certificate.

For every allowance you take, less money gets withheld for federal taxes and more money gets added to your paycheck. Take fewer allowances, and a bigger chunk of your income will be withheld for your federal taxes.

State Taxes

Depending on where you live, you may or may not be required to pay a state income tax. As with federal taxes, money for state taxes is withheld from every paycheck.

Social Security

The federal government requires every working American to contribute a portion of their paycheck to Social Security, a system of supplemental retirement programs established in 1935. The Social Security fund provides benefits to current Social Security recipients.

Under federal law, each worker contributes 6.2% of their gross income directly into the Social Security fund, and every employer adds an extra 6.2% for each employee.

Medicare

The federal government requires every working American to contribute to Medicare, a U.S. government insurance plan that provides hospital, medical and surgical benefits for Americans aged 65 and older, and for people with certain disabilities. Every worker contributes 1.45% of their gross income to Medicare and every employer pays an additional 1.45% on behalf of each employee.

Insurance

If you signed up for medical, dental or life insurance through your employer, your contributions to these plans will be deducted from your pay as well.

Retirement Savings Plans

Contributions to retirement savings plans such as a 401K plan will also be deducted from your pay. When you sign up for a 401K plan, you select a percentage of your pre-tax salary that you’d like to contribute to your retirement account.

Flexible Spending Accounts

A flexible spending plan allows you to set aside pre-tax dollars for medical expenses including health insurance copayments, deductibles and prescription drugs. Contributions to a flexible spending account are deducted from your pre-tax income.

Health Savings Accounts

A health savings account is another way to put pre-tax dollars aside in a special account for medical expenses. To be eligible for a health savings account, you’ll need to select a high-deductible health insurance plan. Contributions to a health savings account are deducted from your pre-tax income.

Why Do You Need To Understand Wage Deductions?

Each pay stub includes year-to-date fields for each withholding category so you can track how much money you’ve paid for taxes, Social Security and Medicare throughout the year. Many employers include a similar listing for contributions to retirement savings plans and health plans. You’ll generally see these fields marked as the acronym “YTD” on your pay stubs.

Any errors in your deductions are your responsibility to report. The last you thing you want is for an error to be repeated through several pay periods. If you have questions about any of the information listed on your pay stub, be sure to contact your HR or payroll provider.

A pay stub also lists gross and net income to-date. This means you know exactly how much money you are taking home. This allows you to accurately and confidently plan your monthly and yearly budgets.

Be sure to check that the information on your last pay stub of the year matches the information on your W-2 form, which details your wages and taxes paid for the year.

Pay Stub Deduction Codes Explained

Below, you will find some of the most common deduction codes that appear on your pay stub. Common pay stub deduction codes include the self-explanatory 401K for retirement savings contributions and 401K ER, which refers to an employer’s contribution if the employee receives a company match. However, this is by no means an exhaustive list.

Many companies list codes on their paycheck specific to how they do business or the benefits they offer to employees. For example, some businesses may list health insurance as HS while others may call it HI. Unions, savings funds, pensions, organisations and companies all have their own codes too, any of which could appear on your paycheck, depending on your circumstances.

Gross PayThis is the amount of money earned during the pay period
FED / FIT / FITWFederal Income Tax Withheld
STATE / SIT / SITWState in which you earned money
OASDI / FICA / SS / SOCSECSocial security tax
MEDMedicare tax
FSA /  HSAFlexible Spending Account and Health Savings Account
401(k)This notes how much you’re putting into your company’s retirement account
Net PayThis is the final amount, after deductions
GARNWage garnish
CHSPPRTChild support payments
LV / LEVYTax levies