Everyone always remembers their first paycheck and asking themselves, “Who’s FICA, and why is he taking all of my money?” If you’re like most people, the number that really matters to you is the bottom line: money in the bank! You may even throw out the rest of your pay stub. However, it is so important to review your pay stub and be able to analyze the information you find there to spot potential errors.
While your paycheck may not always give you the physical wealth you were looking for, it will give you a wealth of knowledge about your finances. Carefully reviewing pay stubs is a step we at DWM take with all of our clients to ensure they’re clear on available benefits, tax rates, employer matches, withholdings, and more.
So, without further ado, here’s a comprehensive guide to reviewing and analyzing your pay stub.
Important Terms and Definitions
First, to help you better understand the different acronyms within your pay stub, let’s take a look at a few of them and their definitions:
PPD: Pay period
REG: Regular hours worked
OT: Overtime hours worked
HOL: Paid holiday hours
VAC: Paid vacation hours
PTO: Paid time off
FT or FTW: Federal tax withheld
ST or STW: State tax withheld
LT: Local tax withheld
SS: Social Security tax
MED: Medicare tax withheld
FICA: Your employer’s portion of the Social Security and Medicare taxes
WC: Workers’ compensation contribution, typically paid by your employer
Additionally, there are a number of terms you will need to know:
Gross pay: This is the total amount you earned during the given pay period (pay period discussed below). It includes your wages or salary, plus bonuses and tips if applicable. Most pay stubs will also include how much you’ve earned year to date.
As almost all areas of your pay stub relate to gross earnings, this number is usually located on the first line of your pay stub with the remaining figures telling you how much of those earnings were withheld for taxes and other uses.
Pre-tax benefits: Some benefits may appear on your pay stub as pre-tax income. For example, if your employer pays for some or all of your childcare expenses, travel expenses, or your parking pass, these may show up as taxable benefits.
Net pay: Also known as “money in the bank,” this number is what you receive as your paycheck after taxes, insurance premiums, retirement contributions, and other deductions have been taken out.
Pay Period: By looking at the dates on your pay stub (usually located at the very top of your pay stub), you can tell if you’re being paid monthly, weekly, or bi-weekly. This helps to know if you need to multiply your current pay by 12, 52, or 26 to determine annual salary. If you are using a mid-year pay stub, you may multiply your current pay by the number of pay periods remaining and add this to your year-to-date figure, mentioned earlier.
Federal income tax: Your pay stub will show how much money was taken out of your gross pay for federal taxes. The exemptions you claimed on your W-4 form determine the amount withheld for federal taxes.
With recent changes to income tax brackets in 2018, federal income tax withholding is an area you should review thoroughly. To see if you are currently withholding enough or too much, go to https://www.irs.gov/individuals/irs-withholding-calculator.
State income and local tax: If you live in a state that requires that you pay an income tax, that number will also be determined based on your W-4 exemptions.
Social Security tax: The federal government requires that every employee and employer pay a tax for Social Security purposes. You, as the employee, pay 6.2 percent of up to $128,400 in wages for 2018. So, if you earn $100,000 per year, your Social Security tax comes out to $6,200 for the year. This tax makes it possible for you to receive Social Security benefits when you retire.
Medicare tax: Similar to the Social Security tax, the Medicare tax is mandatory for employees and employers alike. You’ll pay a 1.45 percent tax on wages up to $200,000 ($250,000 if married) for 2018. There is an additional 0.90 percent, 2.35 percent overall, tax on wages over $200,000 ($250,000 if married). Medicare tax exists so that you can benefit from the program when you come of age.
Understanding Your Benefits
Now that the hard part (taxes) is out of the way, it’s time to understand your benefits.
Insurance premiums: If your benefits include insurance like health, dental, vision, life or disability, your employer may require that you pay for at least a portion of the plans’ premiums. That cost will come out of your gross pay automatically, and how much you pay shows up on your pay stub. Be sure to take some time to understand your insurance policies, as well!
Flex spending account (FSA) or health savings account (HSA): If you opted to participate in an employer-sponsored FSA or HSA, you’d typically see a deduction for these on your pay stub and also note whether your employer has made a contribution (free money!).
Contributions to your retirement plan: This figure is how much you agreed to contribute to your employer-sponsored retirement plan. Common retirement plans include 401(k), 403(b), and 457 plans. If you get a match (more free money!), this number is on your pay stub, too, which shows you how much your employer contributed.
You can divide your employer’s contribution by your gross pay to determine what percentage they’re contributing to your retirement. If you know your employer matches your contributions up to a certain percentage limit, this is a good area to see if you are reaching your full contribution potential and whether you need to adjust accordingly.
Final step! Now that you’ve reviewed each aspect of your pay stub, you have probably come across one or two items you’d like to change. Unfortunately, you can’t do anything about Social Security and Medicare taxes, but you can increase or decrease your federal and state tax withholdings by updating your W-4 form. This can be done by contacting your HR department.
If you’d like to review your pay stub, DWM is always happy to be your second set of eyes and ensure that your pay stub reflects your best interest.