Topic 01 · 5 min read
Reading Your First Paycheck
The number you agreed to and the number you receive are two different numbers.
A pay stub tells a short story. At the top is gross pay — the full amount you earned. Below it sit the amounts removed before the money reaches you: federal income tax, Social Security, Medicare, often state tax, and sometimes insurance or retirement contributions. What is left is net pay, the amount that lands in the bank.
What to know
- Gross pay versus net pay
- Gross pay is hours times rate, or your salary for the period. Net pay is what survives after withholding and deductions. Budget from net pay, not gross.
- Income tax withholding is an estimate
- Your employer guesses at your yearly tax based on the Form W-4 you filled out. The return you file later settles the difference.
- FICA is not income tax
- Social Security (6.2%) and Medicare (1.45%) come out of nearly every paycheck and are not refunded at tax time, no matter how little you earned.
- Year-to-date columns matter
- The YTD column is a running total for the year. It is the fastest way to see whether withholding is on track before December.
- Pre-tax versus post-tax deductions
- Retirement and health premiums taken out before tax lower the income you are taxed on. Things like a Roth contribution come out after tax.
The tax benefit
Understanding the stub lets you correct a bad W-4 early, so you neither owe a surprise bill nor lend the government money interest-free all year.
Worked example
A $15-an-hour summer
Working 30 hours a week for 10 weeks at $15 gives $4,500 of gross pay. About $344 goes to Social Security and Medicare and perhaps $180 to federal income tax withholding, so roughly $3,976 arrives. When a return is filed, much or all of the $180 may come back, but the $344 stays.
Watch out for
- Writing 'exempt' on a W-4 when you actually owe tax creates a bill and possible penalties.
- A missing or wrong address means a missing W-2 in January.
- Tips and cash bonuses are taxable even when they never appear on a stub.
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