You just got your first paycheck and — surprise! — it may be quite a bit smaller than you expected. Don’t worry, though, nothing is wrong. Your employer has simply deducted a number of required (and possibly some elective) payroll-related charges. That’s why you see so many deductions listed on your pay stub.
Here are some terms related to your paycheck that you may want to understand better, as well as a breakdown of what’s typically deducted and why.
Gross Pay
This is the amount of your paycheck before any deductions were taken out, says the Consumer Financial Protection Bureau (CFPB). For example, if you earn $45,000 a year and are paid monthly, your gross pay should be $3,750 ($45,000 divided by 12 months). If you’re paid twice a month or every two weeks your gross amount will be approximately $1,875 per paycheck (see “Pay period”).
Net Pay
“Net” means the amount of money left over after taxes and other deductions are subtracted. This is the actual amount you can cash or that is automatically deposited into your bank account, says the CFPB.
Pay Period
This signifies how often you’re paid, which the CFPB states is scheduled by your employer. Common pay periods are monthly, biweekly, semimonthly or weekly.
Filing Status
When you filled out the necessary paperwork to begin your job, you completed a W-4 form. At that point, you note whether you are single, married filing jointly, married filing separately, head of household or a qualifying widow(er) with dependent child, according to the Internal Revenue Service (IRS). If more than one of these applies, you can use whichever one offers the best tax benefits, says the IRS. (If you have questions about this, such as whether you should file jointly or separately, talk to your tax advisor.)
Federal Taxes
The filing status (see above) you selected on your W-4 helps your employer calculate how much to withhold from your pay for federal income taxes. The amount you see indicated as “Federal Tax Withholding” on your pay stub is what your employer will send to the IRS on your behalf. Everyone pays a different amount in federal taxes, depending on their income.
State and Local Taxes
This deduction is very similar to federal taxes, except that it is the money your employer sends to your state and city or county revenue division on your behalf, says the American Institute of CPAs (AICPA). How much you pay in state and local tax depends on your income and your state’s or municipality’s tax rates.
Social Security or the Federal Insurance Contributions Act (FICA) Tax
You are legally required to contribute to Social Security, which is the U.S. benefits program for retirees, people with disabilities and survivors, such as a spouse or child, of those contributing to Social Security. It’s listed on your pay stub as FICA, which stands for Federal Insurance Contributions Act. As of 2018, you contribute 6.2 percent of your gross pay (minus your pre-tax health care premium deductions) to the program. Your employer contributes another 6.2 percent on your behalf.
Medicare
This is another legally required deduction listed under the FICA heading. This amount goes towards Medicare, which is the U.S. medical insurance program for retirees. Your required contribution is 1.45 percent of your gross pay (minus your pre-tax health care premium deductions), and your employer pays the same amount on your behalf, says the IRS.
401(K) or 403(b) Contributions
If you are eligible to contribute to your employer’s retirement plan (a 401(k) is also referred to as a “deferred compensation plan“) and sign up to have money automatically deposited into it, you will likely see this deduction listed on your pay stub. If you work for a public school or a tax-exempt organization, and enrolled in the available retirement plan (also called a “tax-sheltered annuity“), you’ll see a deduction for 403(b). The deduction amount depends on what percentage of your pay you opted to contribute. Many workplace retirement tax withholdings are considered “tax-deferred” — meaning that you don’t pay taxes on them until you actually withdraw the money from your account. As a result, these deductions may slightly reduce how much you pay this year in federal taxes, explains the AICPA.
If your company offers a match on the money you contribute to your retirement plan, you will likely see it listed on your payroll statement, too. However, that amount won’t be deducted from your paycheck since your employer pays for it.
Employee-Paid Health Insurance Premiums
If your company pays 100 percent of your health insurance costs, you won’t have any money deducted from your paycheck. However, if you pay for all or a portion of your health, dental or vision benefits, your share of the cost will be deducted from your paycheck, according to the AICPA. Your “premium” is the amount you pay on a regular basis for your insurance.
Other Deductions
If you are paying for other company-sponsored benefits, such as life or disability insurance, you’ll see these premiums listed as deductions from your paycheck. Depending on the plan, these costs may be deducted either before or after the taxes on your paycheck are calculated. If your company offers a Flexible Spending Account (FSA), you may be able to contribute money to either a health care or dependent care account on a pre-tax basis (meaning you don’t pay taxes on the contributions), says the Federal Flexible Spending Account Program. These amounts will be deducted from your pay and listed on your pay stub.
Year-To-Date Earnings
As it implies, this item details how much gross pay you’ve earned so far this year — excluding your current pay stub, says the AICPA. However, you may not see this noted if your income is under a certain level.
For more help understanding any of the items on your payroll statement, contact your company’s payroll or employee benefits office.
Originally published on May 2, 2016.
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