Whether you opt for a check or direct deposit, your statement or pay stub will display important information relating to the money you've earned. When reading your paycheck, you'll see the date of payment, the pay period dates, how many hours you've worked, wages earned (both before and after taxes) and any other deductions. You might be tempted to ignore this information, but understanding what it means and why it's important is a crucial part of improving your financial health.
How (and why) to Read Your Paycheck
It’s a good idea to get into the habit of reviewing your pay stub occasionally, especially when you start a new job, so you can confirm that all the deductions in your first paycheck are correct.
Understanding Dependents and Deductions
When you start a new job, your employer will have you fill out a W-4 form that tells your employer how much money to deduct from your check for taxes and benefit contributions. The more dependents you claim, the less tax is withheld from each check.
This will give you more income throughout the year but may result in a tax bill come April. Claiming zero dependents on your W-4 ensures the maximum amount of taxes are withheld from each paycheck, and you'll likely get a refund back at tax time.
It’s a good idea to sit down with your spouse prior to filling out your W-4 so you can determine the correct withholdings based on your family’s budget. The IRS also offers a free tax withholding estimator tool to help you avoid paying more at tax time.
Decoding Your Paycheck: A Glossary of Terms
The following terms and acronyms commonly appear on pay stubs and understanding them makes it easier to decode your statement. Here’s how to understand the terms and parts of your paystub so that you can keep a close eye on where your money is going.
- Gross pay: The total amount of money you've earned during a given pay period before deductions and taxes.
- Net pay: Your total income after deductions and taxes are considered.
- Year to date (YTD): Have you ever wondered what “YTD” means on a check? It refers to the amount of money you've earned since the first day of the calendar year. You may notice year-to-date information in both the deductions section and the pay section.
- Federal income tax (FIT, FT, FWT): The information you provided on your W-4 is used to determine the amount that will be withheld from your paycheck for federal taxes. The more allowances you claim, the less money will be withheld.
- State income tax (ST, SWT): The amount of state income tax withheld from your paycheck. Your state tax rate will vary depending on where you live.
- Social Security tax (SS, SSWT): Employers are required by the government to withhold Social Security taxes from employees' paychecks.
- Medicare tax (MWT, Med): The federal government requires your employer to withhold a certain amount of your paycheck to fund Medicare. Social Security and Medicare taxes are also known as Federal Insurance Contribution Act (FICA) taxes or payroll taxes. Your employer is required to withhold 6.2% of your gross income for Social Security taxes (up to a certain annual limit) and 1.45% for Medicare taxes. Your employer also matches these FICA taxes.
- Retirement or pension plan contribution: If your employer offers a retirement plan (a 401(k), 403(b) or pension), your contributions will show up on your pay stub.
- Benefit insurance deduction(s): Health insurance, dental, vision, life, disability — if you contribute to any employee insurance benefits, your share will likely be included on your pay stub.
Pretax vs. After-Tax Deductions
Depending on the company and your employment status, you might notice some additional deductions appearing on your pay stub or statement. This may include pretax and after-tax deductions.
Pretax deductions (such as for medical insurance and retirement plan contributions) are taken out before taxes and reduce your taxable income. After-tax deductions (such as for Roth 401(k) contributions) don't affect your taxable income. If you’re unsure about how best to take advantage of employer-sponsored retirement plans, a financial advisor can help.
Managing Your Money
An important piece of your financial picture is understanding the money you’re bringing in. This can affect how you do your taxes, how you budget and how much money you are setting aside for retirement. Contact a Farm Bureau financial advisor to discuss your financial goals and decide what’s right for you.