Decode and Understand Your Paycheck

The first paycheck always comes with a mix of excitement and disillusion: excitement over the milestone of taking that first step towards independence; and disillusion with the realization that the government really does take a big bite out of our earnings.

There aren’t many people who understand their first pay stub, there are those who go through life without ever understanding quite how a paycheck works.  To the uninitiated, a pay stub is something that looks like it was actually written in a secret code.  If you take the time to really look your pay stub over though, you’ll find that a big amount goes to federal taxes and then to state taxes.  Apart from taxes and what you eventually take home though, some other things might be confusing.

Deciphering Your Pay Stub

Your pay stub is not as complicated as it seems.  Yes, there are a lot of factors that affect how much money you actually take home, but these factors fit into two main categories:  earnings and deductions.

The earnings portion lists your gross pay and everything that went into arriving at the final number: your hourly rate, the number of hours you worked; any overtime work you rendered and your corresponding overtime rate; any work you rendered during holidays and the corresponding rate for those hours; and finally, money for paid sick or vacation leave days that you consumed.

The deductions section can be divided further into two sections:  Statutory deductions and other deductions.  Statutory deductions are required and are regulated by the government.  Other deductions are usually for company provided benefits.

The bulk of your statutory deductions will go to taxes, federal and state taxes can be reduced if you take the time to study your W-4 form.  You can greatly reduce what you need to pay in taxes if you declare all allowances you are eligible for.  You should consult a CPA to be sure you don’t miss any possible tax breaks.  Take care though to not give any false information just to get a deduction.  This could get you into serious trouble.

There will also be smaller deductions listed under FICA (Federal Insurance Contributions Act).  These will be for Medicare and Social Security.  These deductions cannot be manipulated in any way.  In 2010, the Social Security deduction is 6.2% of your salary, or up to $106,800 a year; for Medicare it’s 1.45%.

Other Deductions
The other deductions portions is for your heath plans, dental plans, loan payments for company sponsored loans, and contributions to retirement funds.  These can be tweaked as well, you can kick up or lessen your retirement contributions, some companies give you the option to downgrade your health plan.  Bear in mind though that for the most part, contributions to retirement funds and HRAs (bank accounts for health related emergencies) are not taxed.  So despite the fact that getting access to cash now may seem more attractive, you are actually getting less money in total in the long run.  All tax exempted contributions in the other deductions portion are designated by an asterisk (*).

Non-Monetary Benefits
Most pay stubs will also list the non-monetary benefits you get from your company.  Regular employees at all companies must be given paid time away from work.  Some companies call it sick leave and vacation leave, other simply call is paid time off.  These are days when you don’t go to work, due to illness or simply to relax, and your company still needs to pay your salary.  Your pay stub will usually give you a running total of how much paid time off you are entitled to.

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