Anatomy of a Paycheck

Getting your first paycheck at a job can be a great feeling. But whether you’ve been working somewhere for two years or two weeks, it’s not uncommon to have a little confusion over all the extra information on your pay stubs. Thanks to additional info from the National Payroll Week team, we’re here to break down the different deductions and items you’re likely to find on your paychecks. The more you know about each of these deductions, the more prepared you can be to plan your budget. 

Before your paycheck: The W-4

Hold up: Before you even get your first paycheck, there’s actually an important form you need to know about first! Your company will likely ask you to fill out a W-4 form—the Internal Revenue Service (IRS) tax form you complete to indicate your tax situation to your employer. You have different choices for this form when it comes to how much you want to take home each paycheck and how much you want withheld from taxes. You’ll also answer questions regarding:

  • Whether you have multiple jobs
  • If you are claiming dependents (like children)
  • Your filing status (whether you file your taxes as a single person, or jointly, as a married couple)

Answer these questions honestly and accurately; They’ll help determine your tax withholdings. Know that if you ask for less to be withheld from your paycheck, that typically means you have the potential to owe more when you file your taxes, depending on how much you make. And vice versa: If you have more withheld from your paycheck, your chances of getting a tax refund increase.

You can absolutely take your W-4 home to complete if you want extra time or help completing it. You can also use the IRS’s Tax Withholding Estimator to help you fill it out. The IRS also recommends completing a new W-4 when your personal or financial situation changes.

Your first paycheck

Now, the good stuff: You just got paid! But before you start spending, it’s important to note that the “gross pay” you expect to make and your actual take-home pay will be two different things. 

Gross Pay

Gross pay is the total amount of money you earn before any deductions are made. If you’re an hourly employee, this will simply be the number of hours worked in a given pay period, multiplied by your hourly rate.

Net Pay

Your net pay is the amount left after all deductions are taken out. This is the actual dollar amount you’ll see as your paycheck total and what you can spend. Net pay is also sometimes referred to as “take-home pay.”  

So just what are these deductions being taken from your paycheck? Let’s break it down.

Mandatory Deductions

Your employer is required to take a certain number of deductions from each paycheck. These include:

  • Federal income tax
  • State income tax
  • Local income tax
  • FICA Social security tax
  • FICA Medicare tax

Yep, you’ll have tax withholdings come out of each and every paycheck. You pay for all of these, except for social security tax and Medicare tax, which both you and your employer pay for. It may not be fun, but many people get a tax refund at the end of the fiscal year where they eventually see some of that money come back.

Note: The actual amount withheld from these taxes depends on where you live. Employers use this information, along with the answers you provided on your W-4 form, to determine how much to take out of your paycheck.  

Benefit Deductions

In addition to mandated deductions, employers may also take money out of your paycheck for different employee benefits, depending on what your company offers and what you’ve signed up for. For many of these benefits, the cost is shared between you and your employer. These might include things like:

  • Life insurance
  • Short and long-term disability insurance
  • Health insurance
  • Dental insurance
  • Retirement savings plan

You might also have the option to take out pay advances, which would be deducted from your paycheck, too.

Depending on where you work, you may have access to some or all of these benefits. It’s important to understand what options are available to you when you start a new company so you can take advantage of relevant benefits that may save you money or help you set aside money for the future.

The more you know about what goes into your paycheck (and what gets withheld or deducted), the more empowered you can feel knowing how to best budget and plan your life. If you have any questions or want to make changes to your deductions, you should speak with your company’s HR or payroll professional. Remember that they’re available to help answer questions, too! Figuring out tax withholdings can be complicated, so never be afraid to speak up and ask for a little help.

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