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Decode and Understand Your Paycheck

I 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 [3] 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 [4] 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 [5] 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 [6])