The Complete Guide to Understanding Your Paycheck

My first “real” job was working as an intern. As a communications major, paid internships were rare, so I was thrilled I had landed a gig that paid a healthy $13 per hour. Working 30 hours a week, I was excited to get that first paycheck. I got paid monthly, so I looked forward to adding $1,560 to my bank account to pay for my college expenses.

When the check came, the final number on my actual pay stub was very different than what I expected. I remember looking at it, feeling completely deflated. I didn’t understand where my math had gone wrong, and I thought there had been some mistake. Of course, there wasn’t a mistake; I just hadn’t thought about important things like taxes.

If you have just entered the working world, reviewing and understanding your paycheck is an important step in managing your finances. Here’s what you need to know about your pay stub:

Paycheck basics

Your “take home pay” (called “net pay” on a pay stub) is what’s left after other obligations have been satisfied. In my case, my take home pay was $1,257 — and it was only that high because I didn’t have money taken out for retirement or health insurance.

Your pay stub shows how much you earned during the work period, overall (“gross pay”). It also breaks down how much of your paycheck goes toward other obligations, like federal taxes, state taxes, Social Security, Medicare, health insurance, retirement contributions, flexible savings accounts, and health savings accounts.

1. Federal income tax

Your federal income tax usually takes the largest chunk out of your paycheck. This amount is what goes toward the government to pay your annual income tax.

When you start a new job and complete a new W-4 form, you fill out the worksheet to calculate how many allowances you have. For every allowance you take, less money gets taken out of your paycheck. Take fewer allowances, and more money will be withheld from your paycheck.

2. State income tax

If you live in a state that has income tax — there are just a few states that don’t — money will also be withdrawn from your paycheck to go toward your state tax.

3. Social security

During your entire working life, 6.2% of your paycheck goes toward Social Security. Social Security is a supplemental retirement benefit all Americans are entitled to when they retire. Your contributions now, when you’re young, benefit older retirees. When it’s your turn to retire, young workers will be contributing to your Social Security benefits.

4. Medicare

You’re also required to contribute to Medicare, a program that provides health insurance to retired Americans and people with disabilities. As of 2018, 1.45% of your paycheck goes toward Medicare.

5. Insurance

If you have health insurance through your employer, money may be withdrawn from your paycheck to go toward your health or dental insurance premiums.

6. Retirement savings

Many employers offer retirement savings options, such as 401(k) plans. If you enroll and participate in a plan, a portion of your pre-tax paycheck is contributed to your retirement savings.

7. Flexible spending accounts

If your company offers a flexible spending account (known as an FSA), it allows you to set aside a percentage of your pre-tax paycheck to pay for medical expenses like copays or prescriptions.

8. Health savings accounts

If you opted for a high-deductible health insurance plan, you might have a health savings account. With a health savings account, a portion of your pre-tax earnings is set aside to cover the cost of medical expenses or procedures.

Reviewing your pay stubs

Although it might feel tedious, it’s a good idea to review your paychecks regularly if you’re an employee. Errors do sometimes happen, or you might find that you’re taking out too much of your paycheck for taxes. If that’s the case, go to your human resources department and ask to complete a new W-4 form to adjust your allowances. Doing so can help you get more money each pay period to cover necessary expenses.

It’s also important to note that if you’re a freelancer, you’re responsible for withholding enough money to cover taxes, Social Security, and Medicare. It’s smart to review your earnings monthly so you can adjust how much to set aside for taxes.

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