When’s the last time you actually looked at your pay stub?
If you’re like most people, the number that really matters to you is how much is written on your paycheck. And if that’s directly deposited into your checking account, you may never hold a physical copy of your pay stub to begin with.
That doesn’t mean it doesn’t exist, of course. It also doesn’t mean it’s not important to review your pay stub and be able to analyze the information you find there and spot errors.
There are a lot of good nuggets about your finances located on this little slip, and carefully reviewing pay stubs is a step I take with all my clients to ensure they’re clear on available benefits, tax rates, employer matches, withholdings, and more.
So grab a copy of your latest pay stub and use this quick but comprehensive guide to know exactly what the numbers mean and learn how you can analyze your pay stub like a financial planner would.
Start with Your Earnings and Taxes
The majority of the information on your pay stub relates to your gross earnings and how much of those earnings were withheld for taxes and other uses. Let’s look at some of the common terms you’ll find here, and what they mean.
Gross pay: This is the total amount you earned during the pay period. 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.
Net pay: Also known as your take-home pay, this number is what you receive on your paycheck after taxes, insurance premiums, retirement contributions, and other deductions have been taken out.
Pay Period: By looking at the dates on a client’s pay stub, I can tell if they’re paid monthly, bi-weekly or twice a month. This helps to know if we need to multiply the pay by 12, 26 or 24 to determine annual salary.
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, your phone bill, or your parking pass, these may show up as taxable benefits.
Federal income tax: Your pay stub will show how much money was taken out of your gross pay for taxes. The exemptions you claimed on your W-4 form determine the amount withheld for federal taxes.
This is an area I look at closely for clients. Are you over or under withholding? Are you claiming two when you should claim zero? You can change your exemptions at any time. This will impact how much money you take home each pay period.
If you opt to have less money withheld for taxes (meaning you’re claiming more exemptions), your paycheck will be bigger — but you need to plan ahead for tax filing time, since you might owe taxes instead of getting a return.
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. Cities, counties, and school districts in 14 states may also charge a local tax, but this is relatively rare.
Social Security tax: The federal government requires that every employee and employer pay a tax for Social Security purposes. That’s 6.2 percent of up to $127,200 in wages for 2017. 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 for 2017 so that you can benefit from the program at the same time as when you begin receiving Social Security benefits in retirement.
Understand Where Your Deductions and Contributions Go
Taxes usually make up the largest deductions to your paycheck. But depending on what kind of benefits your employer offers, there may be others you need to know. Review your pay stub for some of these items.
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.
I can easily tell if a client is taking advantage of these employer-provided benefits by looking at a pay stub and from there can dig in more to the types of coverage available.
Retirement plan contributions: 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 (free money!), this number is on your pay stub, too, which shows you how much your employer contributed.
I divide both the client and the employer’s contribution by their net pay to determine what percentage they’re contributing to their retirement accounts and can also tell whether it’s a Traditional or Roth plan.
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 (i.e. more free money!).
Other deductions and additions: Depending on your employer, there may be more deductions. For example, you might donate part of your paycheck to a charity that partners with your employer — which should appear on your pay stub.
You might also see other numbers and information, depending on how expenses are handled for your position at work. If you receive expense reimbursements, for example, these will be included in your paycheck and recorded on your pay stub.
Wait: What About All These Letters?
If you thought you only needed to worry about the numbers on your pay stub — since this is about the money you make, taxes you owe, and contributions you put away in other accounts, after — you may feel overwhelmed by all the codes that appear.
Since there’s a lot of information to fit onto one paper, many employers abbreviate some terms. Here are some common ones to know:
- YTD: Year-to-date
- PPD: Pay period
- REG: Regular hours worked
- OT: Overtime hours worked
- HOL: Paid holiday hours
- VAC: Paid vacation hours
- 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
The Questions to Ask After You Analyze Your Pay Stub
Now that you know how to read your pay stub, take the next step by making sure everything is correct and in your best interests. Here some questions you may want to ask:
Which deductions can and can’t I change? 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.
You can also change some deductions by adjusting your insurance coverage or HSA and 401(k) contributions. You can typically only change FSA contributions once a year during open enrollment for the following year.
Are my tax withholding allowances up to date? If you got married or had a child recently, you may qualify for more allowances, which means less taxes withheld.
Contact the HR department to update your W-4 form.
Who should I talk to if I have other questions? While this guide will help you get started, there’s no way to cover everything that might pop up on your particular pay stub. If you have questions about something, reach out to HR to get clarification.
If you work for a small business with no HR, your direct supervisor or manager might be the best person to talk to. Or talk to your financial planner first. She can analyze your pay stub with you, and help you identify the specific questions to ask at work.
Now, you should be all set: grab that pay stub and check it out. Make sure you understand every piece of information on it — and if you don’t, reach out and ask the right professional. Whether it’s HR or your financial planner, we’re here to help you make smart money choices.