Recently, a client asked me to help them understand their paycheck deductions. This made me think about how I learned how to read my paycheck and the truth is I learned because I'm an accountant. I've recorded so many payroll entries in my career that I take understanding payroll deductions for granted.
Understanding what is being deducted from your paycheck gives you clarity about your current position, there is no vagueness or uncertainty. You know what you can expect each pay period, this comes especially handy for freelancers and hourly employees.
First let's go through the basics of reading your paycheck and then at the end, I will share with you a couple of paycheck calculators that have helped me estimate my paycheck ahead of time. There are 4 main groups:
Gross Pay - This is the total amount you get paid for the period this paycheck covers.
If you receive a salary, this amount will be your salary per day for the number of days in that pay period.
If you are a freelancer or an hourly employee, it would be the fixed amount agreed for a project or the hourly pay for the number of hours worked.
Federal income tax - current tax rates are anywhere from 10-37% depending on how much you're earning
State income tax - each state has their own tax rate and some cities have local taxes as well, a good summary of each state's taxes can be found on this Bankrate interactive map. There are also 7 states that don't have income tax on personal income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming
Social Security tax - fixed rate of 6.2%
Medicare tax - fixed rate of 1.45% (and an additional 0.9% for individuals making over $200,000 and married couples filing jointly making over $250,000)
Sometimes Social Security and Medicare taxes get combined into one group under FICA which is an acronym for the Act that put them into effect (Federal Insurance Contributions Act).
Voluntary Deductions - these are deductions for benefits that you agreed to that aren't mandatory like the section above
Health insurance premiums
Life insurance premiums
Flexible spending accounts
Employee stock purchase plans
If you see a deduction on your paystub that you're unclear about, sometimes the acronyms and abbreviations aren't very straight forwards, check in with HR.
Net Pay - This is the amount left over after subtracting mandatory and voluntary deductions from your gross pay.
There are some scenarios where it's not as easy to estimate what your net pay will be. When you receive a bonus it is typically taxed at a higher rate, but check with HR how it will be taxes so you're aware and not surprised with a 50% tax deduction.
There are also paycheck calculators that can help you take into account your regular pay and bonuses or maybe that pay raise you recently received! My favorite paycheck calculator is by PaycheckCity you can play around with it here.