It’s an easy mistake to make, especially for first-time workers.
Your new boss tells you you’ll be making this much per hour. But when you get your first paycheck, you realize your take-home pay is much lower than what you’re expecting.
With some research, though, you figure out the difference between gross pay and net pay. But perhaps, there are still some items in your paycheck you don’t quite understand.
Don’t worry, you’ve come to the right place. Here, we’ll talk about how to read your paycheck, and why it’s important to check your pay stubs regularly.
4 Things to Note When Reading Your Paycheck
Aside from your gross pay and net pay, you need to understand withholdings for federal and state taxes and other deductions. Let’s talk a bit about these 4 items so you can familiarize yourself with the standard information presented in a typical paycheck.
1. Gross Pay
So you know that gross pay refers to your wage before taxes and deductions, but do you understand how your employer calculates it?
If you’re an hourly employee, it’s your hourly rate multiplied by the number of hours you worked. Tips, commissions, overtime pay, and other applicable sources of income will also be added to your gross pay.
Now, if you’re a salaried employee, the computation of your gross pay will depend on how many pay periods you have throughout the year. If you’re paid once a month, then it’s your annual salary divided by 12.
2. Net Pay
Your gross pay is the starting point for calculating your net pay. Since your net pay is your take-home pay after taxes and deductions, you have to understand which deductions are mandatory, and which ones are voluntary.
Take note that these deductions will depend on your withholding allowance and filing status, which are details you’ll find in your Form W-4.
3. Mandatory Deductions
Federal income taxes, Social Security, and Medicare are all mandatory deductions. As for state taxes, it depends on where you live.
Some states require employees to pay a separate state income tax in addition to the other mandatory withholdings.
4. Voluntary Deductions
Did you sign up for medical, dental, or life insurance through your organization? Some companies pay part of their employees’ premiums, which means you’ll pay the rest.
Other items that might be deducted from your wage include flexible spending accounts, retirement savings plans, and health savings accounts. Keep in mind that while you’re not required to pay for these items, having them deducted from your salary is one way of investing in your future.
Checking Your Paycheck: Why It’s Important
When your payroll department makes a mistake on your paystub, it’s your responsibility to have this error corrected. Just imagine if this error happens several times.
You might end up having to pay the IRS if your employer doesn’t take out enough taxes, or worse, you could be receiving fake paycheck stubs. Bottom line: Always check your pay stub, not only to track if you’re getting paid right but also to have mistakes corrected as soon as possible.
Want to Know More About Payroll and Pay Stubs?
Now that you know more about understanding your paycheck, don’t stop here.
For more information on payroll and pay stubs, feel free to check out our other posts. We also have articles on budgeting, personal finance, and other topics you might find interesting.
