Decode and Understand Your Paycheck

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Pay StubI remember when I received my first real pay stub, it was a mixture of happiness and absolute horror. It was my first summer internship after my freshman year of college. I was earning something like $12 and I was pumped that in my first week I’d earn $480. Then I saw my paycheck.

At first glance, your paycheck is a lot of numbers in tables. If you spend a few minutes, you can generally decode and understand what’s going on. However, sometimes it takes a little extra work because your company will use acronyms you aren’t 100% familiar with. When I looked at my first paycheck, I was able to decode it pretty easily… the Feds got their piece, NY state got their piece, and then this weirdo named FICA took a little slice. What? Who the heck is FICA?

This post is part of Bargaineering’s 2010 New Graduate Guide series where I’ll share my insights and offer my financial guidance to the graduate class of 2010. This post is part of day 4, tangling with the tax man.

Decoding Your Paycheck

You have two main sections on your paycheck – the earnings and the deductions. The earnings will describe the income you’ve earned for the Pay Period, listing both your rate, for the period, and the number of hours in that period. This is fairly straightforward and this is known as your Gross Pay.

Your Net Pay is your Gross Pay minus all of your deductions. Deductions are broken up into two categories – Required or statutory deductions and Other deductions.

Required/Statutory Deductions

This section covers deductions for Federal and State taxes, Medicare, and Social Security. For the most part you can’t change how these deductions are handled. The only one you can control are the Federal and States taxes, as the amount deducted will depend in part by the number of exemptions you claimed on your W-4. You can adjust your withholding if you suspect you are paying too much in taxes. Various calculators can help you determine if your is withholding too much, it’s not simply a matter of looking at the federal income tax brackets and doing a simple calculation.

Medicare and Social Security, sometimes listed as FICA, cannot be adjusted. In 2010, 6.2% of your salary, up to $106,800 in annual earnings, will be taken out of your paycheck for Social Security. 1.45% will be taken out for Medicare taxes. You may see the two listed as a FICA deduction. FICA stands for Federal Insurance Contributions Act, which covers both (and other insurance like old-age, survivors, and disability insurance).

Other Deductions

This section covers every other deduction from your paycheck. You will usually find the deductions for your medical insurance, dental insurance, retirement contributions like your 401(k), disability insurance, and other similar “optional” deductions. You can change these deductions by changing the underlying reason for them. If you reduce your retirement contribution, then this deduction will be smaller.

In this list of deductions, there should be an indication that certain deductions are “excluded from federal taxable wages.” On ADP paychecks, that symbol is an asterisk (*) beside the dollar amount. This means that those deductions are not taxed by the federal government.

Other Benefits & Information

This final section doesn’t have pay information but does list any other benefits you have, such as vacation and sick time. Some companies keep separate tallies for your sick days and vacation days. Other companies will lump them into one grouping and call it Paid Time Off (PTO). However your company does it, your accrued hours and used hours are listed here.

Finally, have your paycheck direct deposited as soon as possible. There’s no reason why you should wait for a paper check in the mail, have it direct deposited and get your money that much sooner.

That should cover everything on your pay stub. If there is a piece of information on that form that confuses you (or confused you once upon a time), please share it in the comments!

(Photo: elswifterino)

{ 29 comments, please add your thoughts now! }

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29 Responses to “Decode and Understand Your Paycheck”

  1. James says:

    KNOW YOUR PAY! Look at every check! Understand how much you pay for your benefits and ensure that it is correctly deducted from your checks.

    For instance, if you have health insurance, make sure they’re taking the right amount out. I work in HR for the federal government and know that if you have insurance coverage, but they forget to take out the premiums from your check, they may come back and get that money–even if it’s a clerical error on their part. If this has been going on for a while you’re looking at tens of thousands of dollars potentially.


    • NateUVM says:

      Well, of course they’re going to come back looking for the missing premiums… Even if it is their error that they haven’t been deducted from your pay, you are receiving a service that you need to pay for (insurance coverage).

      But your overall point is a good one (Know your pay). In my case, I’ve got a dependent care FSA that has a separate site that tracks the balance. I’ve only been doing it for two years now, but there has already been an instance of when the FSA contribution was taken out of my paycheck but wasn’t added to my FSA balance. Simple call to fix it, but if I hadn’t been checking, it may never have been fixed (or, may have taken a while to wait for an audit, or the like).

      “KNOW YOUR PAY.” Agreed.

    • Wilma says:

      Absolutely know your pay. Always check to see that all deductions are there and correct BEFORE you spend or pay bills. Make sure if your vacation time is on there and that it is also correct. Never be afraid to ask questions if some thing doesn’t look right. The people who do your pay roll are only human and errors do occur. If they over pay you, you know they’re going to catch it eventually. Getting to know your pay stub is some great advise. =)

  2. tbork84 says:

    Direct deposit can not be emphasized enough. Its a great way to keep control of your finances by not keeping cash in your wallet. Also, most banks require it for “free” checking accounts and the like.

  3. moljacks says:

    One tip is track your paystubs in excel. I had an employer mistake that could have been costly, but I caught it right away.

    I love seeing how much I have contributed to my 401k over the year!

    • Shirley says:

      Thanks for that tip!
      I use excel for a great many things, but I never even thought of doing that.

  4. cdiver says:

    Make sure that your tax deductions are being calculated correctly. You don’t need to find out they are being done wrong on tax day!

  5. It is scary looking at that pay stub the first time and seeing how much is taken out. I always do a quick mental estimate. I just figure out my gross and multiply by 3/4. That usually gives a pretty good estimate of what you can expect to receive.

    • Anthony says:

      Hmm… that would be really rough, and likely wrong, depending on what deductions you’re taking and what tax bracket you’re in.

      For example, what hits my checking account is 45% of my gross pay. I’d be way off using a 3/4 multiplier.

  6. Shirley says:

    With the kids, just prior to receiving their first paychecks, we warned them about counting just hours and not deductions. But each first sight was met with, “Hey wait a minute!”

    Seeing is believing. 🙂

    • fairydust says:

      I know – our son’s first check really shocked him because he’d been tracking hours in his head in spite of our warnings. “What’s all this?!” 🙂

    • daenyll says:

      my first jobs as a kid I counted hours then took off 25% for any taxes, etc. That way I had a rough idea of what to expect for takehome pay and when the taxes and everything were less that was just bonus.

  7. Lynn says:

    I think you meant to say that Social Security and Medicare are listed as FICA and not FICO! LOL!

  8. Maria says:

    This is such a great series. Publish it and I’ll be buying copies for every graduate I know. 🙂

  9. zapeta says:

    Definitely make sure that you look at your pay stubs and ensure all of the numbers are right. As others said, you want any problems with your pay or deductions to be caught as soon as possible.

  10. Saul says:

    There’s a typo here.

    Various calculators can help you determine if your is withholding too much, it’s not simply a matter of looking at the federal income tax brackets and doing a simple calculation.

  11. eric says:

    That’s what I thought when I saw my first paycheck too. Who’s this damn FICA guy? 😉

  12. billsnider says:

    A side story on first pay checks.

    There was a time when employers withheld your first paycheck. I worked for such a company.

    I started on July 2nd and was desperate for some cash when they paid us on July 31st. Only they didn’t pay me. They withheld that check. I had to wait until August 31st to get that months pay. I quit after one year and got two months pay when I walked ou the door. I had every person I knew with their hand out as i left wanting their money back. I was rich in one second and flat broke in the next.

    The next company paid bi-weekly and yes, they withheld that paycheck as well. Fun times.

    I had a pretty good salary, but couldn’t live on it because of this practice.

    Bill Snider

    • Shirley says:

      Sounds like you needed a paycheck’s worth on hand before you ever started. Scary if it ends up causing kiting. 🙂

      Is that system even legal anymore? I thought that only a partial week was legal to withold.

      • billsnider says:

        At some point my second employer gave us that back check. So I think it is not legal or not done anymore.

        When I got out of college, I had zero to my name. I had to borrow money from my parents to buy suits, rental security and first month rent, one year car insurance in advance (I had not previously owned a car), car down payment, food, etc., etc. You get the idea. It was overwhelming.

        You can imagine how devasating it was to me when I didn’t get paid that first month AND had to wait another month. I turned to my roommates, family and others to get me by. I was asked repeatedly what I was doing with my money. People couldn’t understand what this high paid college graduate was doing.

        Bill Snider

        • Shirley says:

          Which (if it were me) would have brought forth a very loud “Aargh!” Quite often we don’t understand someone else’s situation. We do have the opportunity to learn so very much from others… like here on this blog… 😉

  13. Anonymous says:

    My recent pay stub shows 9503.39 in ytd hourly earnings and my net is 6117.28 and my deductions are 712.33. Is this right

  14. JESSICA says:


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