However, its important to know where your hard earned cash is going, and what all the line items on your paystub mean, as well as verifying your gross income with an hourly paycheck calculator. While most employers have good intentions, we are all human and subject to making errors.
Hold on to your pay stubs!
Your pay stubs are important for a number of reasons, so its worth holding on to them. Some contain sensitive information such as your name, address, and social security, which you want to prevent from getting into the wrong hands.
Your hourly paycheck (pay stubs) can be used as a tool to check and monitor your credit and having them on hand makes this easier to do regularly. Having them on hand also allows you to see if there is anything that has changed or looks out of place, as you’ll notice this much sooner.
If you are applying for a credit card, line of credit, or various other financial products from a lending institution, they may request recent pay stubs. Keep them in a safe drawer or cabinet for easy access when needed.
Understanding your hourly paycheck
There are a number of taxes and deductions that can be found on a pay stub, and can be quite confusing at a glance. Generally most pay stubs will include:
Breakdown of contributions and withholdings
A portion of every hourly paycheck is sent to the federal government as a partial payment of your annual income taxes. Your earning bracket and the information you filled out for your employer on your W-4 form, dictate the amount that is given to the government. This form also is called the Employee’s Withholding Allowance Certificate, in which you can make allowances for yourself and dependants for up to $4,050.
The more you claim on your allowance, the less money that gets allocated to federal taxes. Likewise fewer allowances result in a larger portion of your income being withheld.
Depending on where you live you may or may not have to pay state income taxes. There are seven states that do not implement any income taxes:
New Hampshire and Tennesee residents only have to pay taxes on dividends and income from investments, not wages.
The lack of income state tax usually results in higher taxation on sales (up to 8.8%), and higher gas prices as well. So before you pick up and move to reduce the tax on your paycheck, take a closer look at where those taxes are made up.
Social security is a mandatory retirement supplementation program, which requires American citizens to contribute 6.2% of their gross income, with employer-matched contributions, for a total of 12.4% contribution. The fund later provides benefits to social security recipients when they reach their retirement.
Medicare is another mandatory social insurance program that is put in place to provide medical, hospital, and surgical benefits, for Americans over 65 years old, or Americans with certain disabilities. Every worker contributes 1.45% of the gross income, with employer-matched contributions, for a total of 2.9%.
The following are optional programs that may be offered by employers that wil result in additional withholdings, should you opt in.
Insurance: Any life, medical, or dental insurance that you signed up for through your employer will also be deducted from each pay. The amounts will vary depending on what is provided in the plans.
Health Savings Account: Pre-tax dollars can be set-aside in a health saving account for emergencies. In order to be eligible for this saving account, you must first have a health insurance plan with a high deductible.
Flexible Spending Account: This plan allocates a portion of your income before tax to medical expenses such as insurance co-payments, deductibles, and prescriptions.
Retirement Plans: Any income that is contributed to Roth or 401K is tax deferred, meaning it can be deducted from your gross income before taxes. The amount that you contribute is in percentage format (ie. 1-5%), but has a maximum yearly allowance. In some cases employers will match contributions as well.
Every paystub will include both your current and year to date contributions, gross income, and net income.