Congratulations! You're hired to work full-time at your first summer job, and you can't wait for
your first paycheck. Payday arrives, and you are looking at less than you expected.
You ask your manager, and they say, "check your paystub" You do, and nothing makes
sense, so you take it and tell yourself some money is better than no money.
Now it is years later, and you're older, better trained, and have more experience. Training and experience lead to higher pay, additional expenses, and the need for money management.
Managing your money coming in and money going out leads to financial stability, control, and freedom.
Successful money management begins with understanding your money earned and the money deducted from the money you earned. Your paycheck! Examining the parts of your pay stub is our approach to understanding your paycheck.
Why your check is less than you expected can be answered by unpacking parts of your pay statement.
What is the pay period? When does it begin?
What is gross income?
What is YTD?
What do all the deductions mean?
What do you do when you work for yourself?
What is a pay stub?
I have a direct deposit. I don’t receive a paystub. Where do I find it? Ask your manager or HR department how to obtain your pay stub.
What is a pay period?
The pay period consists of a certain amount of calendar days used to calculate your wages for your paycheck. Your employer sets the pay period; it can be weekly, biweekly or monthly.
Your pay stub has two main sections.
Income (money you've earned)
Deductions (money paid out for a mixture of benefits and government programs)
Gross income - money earned from working before taxes and other deductions are withdrawn. The important detail about gross pay is you don't take it all home.
Net pay, also known as take-home pay, is all the money you can use for expenses, savings, and investing after subtracting deductions and benefits.
Year to date (YTD) - All the gross income earned, deductions subtracted, and the total amount of net pay received since the beginning of the year.
You can be an hourly or salaried employee. Salaried employees receive a fixed income; their earnings are not based on the hours worked, whereas an hourly employee gets paid the number of hours worked in a pay period times their hourly rate. Salaried employees' take-home pay doesn't change much from period to period. An hourly worker's income changes from period to period depending on the hours worked.
Important information:
Federal taxes fund programs in the United States and is regulated by the nation's leadership.
State taxes fund programs in each state. Each state controls its tax code.
Local taxes fund county and township programs. Each municipality is responsible for regulating and allocating its budgets.
The taxes deducted from your income depends on where you live and work, your earnings, marital status, and qualified dependents. Getting married and having children are significant life changes that can have substantial tax implications.
State tax - money withheld by your employer to pay your state income tax, so you don't have to bear a high tax liability when filing your taxes.
State and local taxes deducted from your income depend on where you live. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax. However, you are still responsible for federal and possibly local income tax if you live or work in a state with no state income tax. If you live in a state that deducts state income taxes, the method for calculating your state income tax is relatively similar to how federal income taxes are calculated.
Federal tax - money withheld by your employer to pay your federal income tax, so you don't have a high tax liability when you file your taxes.
How does your employer know how much to deduct from your paycheck?
"The basic calculation is this: Your employer reports your annual salary and the number of dependents you declare on your W-4 form to the federal government. The Internal Revenue Service (IRS) then estimates how much federal income tax you should pay for a given year and divides this by the number of paychecks you will receive (generally 12, 24, or 26). They will then deduct this amount from each paycheck. The exact process applies to hourly employees— your employer will estimate your monthly income, and you will have a percentage of your pay withheld for federal income tax". [1]
Federal Insurance Contributions Act (FICA) is money withheld to support the government's medicare and social security programs. The medicare program assists citizens 65 and over and certain people with disabilities. The social security program helps retired workers, people with disabilities, and their dependents.
Why do you need to check your paystub?
To confirm your gross pay is correct, the right amount of money is subtracted from your gross income, and ensure your employer deducts the actual costs of your benefits from your gross salary.
Why is the YTD on the paystub?
This amount should match what is on your wage and tax statement (W-2) at the end of the year. It is not always the case that they correspond with each other; there are some cases when they don't match. Follow up with your Human Resources department or payroll company if they don't match.
How long should you keep your paystubs?
You should keep your pay stubs for one year. You are sent a W-2 at the beginning of the following year; compare your paystubs with the W-2 for correctness.
For self-employed and independent contractor workers:
If you are self-employed or an independent contractor, you are 100% liable for paying your federal and state taxes (if you work or live in a state that deducts income tax). You are responsible for paying double the contribution percentage to federal social security and medicare programs. You do have the benefit of breaking up your payments. Estimated tax is used to pay tax on income not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. [2]
You will pay taxes if you live or work in the United States. In addition to taxes, your employer may offer you benefits, such as health and retirement plans requiring additional money subtracted every pay period. Everyone who earns money is required to pay some tax (federal, state, or local). The taxes you've paid throughout the year should come close to what was estimated to avoid tax liability.
It is better to pay your taxes throughout the year in small amounts over time rather than pay one large tax bill when you file your taxes. Overpayment is better than underpayment. Remember to notify your payroll department or the internal revenue service of any changes to your location, marital status, or dependents.
Do you want to know why your paycheck is less than you expected?
Check Your Pay Stub!
You don't need to be a money person to manage your money successfully.
You don't need to be a money person to understand why you receive less than expected in your paycheck.
You are a money person if you earn money and use it to buy goods and services.
If you find managing your money overwhelming and burdensome, contact us, and we will help you successfully manage your money.
