Have you ever received a paycheck from your employer and thought, "Man, this looks a little light?" If so, you are not alone. Payroll is complicated. Mistakes happen. And yes, sometimes, your employer is trying to get one over on you, but that's pretty rare. No matter the cause, if you live paycheck to paycheck like 78% of the American workforce, you can't afford someone else's mistakes.
Read on to learn how to read a pay stub so you can catch costly errors.
Gross pay is the total amount of money you earn before anything comes out of your check. This is the most important number on your pay stub as every other number on your pay stub gets based on this one figure. What follows is an explanation of how to calculate your gross pay for an hourly or salaried employee. Take a look at this article if you work for tips. That's a little bit different.
If you get paid hourly, you can calculate your gross pay by multiplying the number of hours you worked during a pay period by your hourly wage.
You work 40 hours during a single pay period at an hourly rate of $15 per hour.
40 x $15 = $600
Your gross pay for this pay period is $600.
(We use this example throughout the rest of this article.)
If you get paid a salary, you must determine how many times you get paid each year before you can calculate gross pay.
The most common types of pay periods are:
- Weekly with 52 pay periods per year
- Bi-weekly, or once every two weeks, with 26 pay periods per year
- Semi-monthly, or twice a month, with 24 pay periods per year
- Monthly, with 12 pay periods per year
Now that you know your pay frequency, divide your annual salary by the number of times you get paid per year.
You get paid bi-weekly and have an annual salary of $100,000 per year.
$100,000 / 26 = $3,846.15
Your gross pay for each pay period is $3,846.15.
Deductions are anything your employer withholds from your check. Common deductions include:
- Contributions to a retirement plan like 401(k)
- Payments toward a Health Savings Account (HSA)
- Insurance payments
- Child support garnishments
The money withheld gets used by your employer to pay the expenses associated with each deduction. Employers must itemize these deductions on your paystub so you can see where your money goes.
Some deductions aren't taxable and are not included as part of your taxable income. The retirement plan and HSA contributions are both examples of a pre-tax deduction. To calculate taxes correctly, you must first determine your taxable income. To do so, you will need to subtract all pre-tax deductions from your gross pay.
You put $30 per paycheck towards a 401(k) and $20 per paycheck into an HSA for a total of $50.
$600 gross pay - $50 in pre-tax deductions = $550.
Your taxable income for this pay period so far is $550.
You just got paid and now Uncle Sam wants his cut too. But how much of your pay should he get? That depends. When you first started your job, you had to fill out a W-4 form. In this form, you disclosed your marital status and the number of allowances you wanted to claim. Each allowance takes off a certain amount of money from your taxable income.
In 2019, each allowance was worth $4200 for the entire year. So if you get paid weekly, you can subtract $80.77 from your taxable income per claimed allowance. Once you know your taxable income, you can use the tax tables in Publication 17 to determine the amount of taxes you owe for a given pay period. Tax tables begin on page 245.
You marked your marital status as Married, filing jointly.
You claimed 3 dependents for a total allowance of $242.31.
Your current taxable income according to our previous example is $550.
$550 - $242.31 = $307.69 taxable income
According to the tax table, if you make at least $300, but no more than $325, you owe $31 in federal taxes.
Social Security And Medicare Taxes
Social Security and Medicare taxes are taken out of your check each pay period to help pay for your expenses throughout retirement. In 2019, the Social Security tax rate was 6.2% of your taxable income. The Medicare tax rate was 1.45%. On your paystub, you may see a line item called FICA. This is your Social Security and Medicare taxes totaled together.
Your taxable income, as determined in our previous example, is $307.69.
$307.69 x 6.2% = 19.08 for Social Security
$307.69 x 1.45% = $4.46 for Medicare
State taxes vary based on the state you live in. Most have a tax table you can use to determine your state tax amount similar to what is found in Publication 17. Some states, like Florida, don't have an income tax. Other states, like Alabama, have a local tax in addition to their standard income tax.
Net pay, also called take-home pay, is gross pay less your taxes and other deductions. As the nickname suggests, this is how much you actually get to take home when your employer issues you a paycheck. After you total all your deductions and subtract them from your gross pay, you should have your net pay.
If what you calculate does not match the net pay amount on your paystub, speak with Human Resources. They can explain why the numbers don't match and facilitate any necessary corrections.
In our example so far, you owe $31 for federal taxes, $19.08 for Social Security, and $4.46 for Medicare.
$31 + $19.08 + $4.46 = $54.54.
Let's pretend like you live in Florida and don't have any state taxes, nor do you currently have any other deductions.
$600 gross pay - $54.54 in deductions = $545.64 net pay
The Basic Information Is Important, Too
The information at the top of your paystub has basic details about you and your employer. Check your name, social security number and mailing address for accuracy. Pay careful attention to your name and social security number. This is the information tied to your government accounts. If it's wrong, then you may not receive credit for paying towards your taxes.
This is especially important for social security and medicare. If you can't prove you contributed to them, you won't be able to enjoy their benefits during retirement. It's also important to make sure your mailing address is correct. This ensures that if your W-2 gets mailed to you at the end of the year, and arrives at the right place.
Still Confused About How to Read a Pay Stub?
We told you Payroll can get quite complicated! Paystub Creator makes it easy for you to create your own pay stub. Just plug in your information carefully and correctly and we'll generate a paystub for you! You can then compare your employer's paystub to your paystub and make sure you are getting paid the way you should.
Create your paystub today and spend less time worrying! If you want to know more about tax scams, check out this article to stay informed.