Your Paycheck Explained

Making sense of your paycheck: why isn’t it the number you thought it would be?

The good news is that you have a job and are getting a regular paycheck – but what do those deductions and taxes all mean? Understanding your paystub is a very important part of being financially literate, because it will help you maximize your take-home pay.

Typically, a paystub includes several sections:

• Gross Pay: the total amount you earned before any deductions. From the gross pay, the following is taken out:
  • Federal and State Taxes: based on the state you live in, your income and your filing status, these taxes can vary greatly.
  • Social Security and Medicare: these are mandatory contributions. This money is used to pay out retirement (Social Security) and healthcare (Medicare) programs.
  • Retirement Contributions, such as 401(k) or similar plans: this amount is often deducted pre-tax.
  • Health Insurance Premiums: Your share of the premium is deducted from your paycheck, if your employer offers health coverage.

How can you boost your paycheck?

You could pay for expenses with untaxed money. This is called leveraging your pre-tax benefits, since you use your benefits to lower your taxable income, so you pay less in taxes overall. For example, you can make contributions to your Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and commuter benefits.

A good decision would be to have a look at your W-4 form. This establishes how much federal tax is withheld from your paycheck, based on your allowances. You can then see if you are able to adjust your allowances so you aren’t overpaying or underpaying taxes.

It is important once a year to review and confirm the choices you have made regarding your employee benefits. You likely made these choices when you first got the job, but are they still valid? Since then, have you had a major life event, such as getting married or having a child? You may also discover that you are paying for coverage which you don’t use. Periodically reviewing the benefits you have selected could help you save money.

Reviewing your paycheck lets you know where your money is going, so you can make every dollar count.