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Understanding Your Paycheck

Picture this: You started a new job, the pay rate is almost twice what you were making before and you can’t wait to treat yourself and celebrate. Then, when the direct deposit hits your account it seems like half the money you thought you were getting is missing! HR and payroll give you a copy of your pay stub and tell you all is correct and that is your NET amount, not your GROSS pay, and all you see is a paper full of boxes and numbers. How do you make sense of all this?

Let’s start untangling this mystery. Although some paystubs might look slightly different, most of them will include at least three key sections: how much money you are being paid, how much money you are paying for federal and state taxes and other deductions taken from your pay.

1) Section 1: Gross vs. Net Pay

This is usually located at the top of your paystub, after your name and personal information. For pay rate, if you work by the hour, you will see the number of hours worked and how much you are being paid per hour. If working overtime, the hours and rate will appear in a separate line. The main figures to focus on are:

1) Gross pay: The amount you are paid before taxes or deductions are taken out

2) Net pay: The amount you actually receive after all taxes and deductions have been taken out

3) Year To Date (YTD): The total amount received since the beginning of the year, depending on pay stub, might show YTD Net and Gross pay, as well as hours and other aggregate categories.

2.) Section 2: Federal and State Taxes you pay

This is an important section in your paystub. These are some of the lines you may see:

a)Federal withholdings (federal taxes), Medicare and Social Security. This combination of estimated contributions is mandatory and may take up 7.65% of your gross income.

b)State and local taxes. These are your estimated payments towards your State income tax obligations.

Keep in mind that these tax deductions are not fixed, but based on the answers you submitted when you first started working on a form called W-4. On this form, you select the number of dependents you have and your HR department estimates how much to retain from your paycheck for taxes.

c)It is also important to keep in mind that the withholdings or contributions taken from your paycheck for taxes may not represent your total tax debt. In other words, when you file your tax return, the IRS will consider various factors, such as your household size, eligibility for deductions and credits, to recalculate your tax liability and determine if you will be getting a refund or if you underpaid your taxes and will have to pay the IRS and the State back.

3) Section 3: Other deductions:

Outside of taxes, you also pay other voluntary deductions (some might even be mandatory). These typically include payments for benefits like health insurance, retirement savings and transit, which you get to choose. The amounts for these voluntary withholdings vary significantly, depending on the costs of plans your employer offers and which options you chose. Health Insurance premiums can be especially costly. While not as common, you might also notice certain mandatory deductions which can reduce your payment significantly. For example: child support payments or consumer debts (like credit cards and personal loans) if you were sued in court and had a judgement entered against you.

Keep in mind that you should always get a notice from your payroll or HR department for these types of debts, and you should be given a chance to challenge or dispute them, if they are not correct.

Paychecks, although at times confusing, are key to knowing why you are making the amount of money that you are making and if there can be any adjustments. If you find yourself wondering about your pay, consider scheduling an appointment with a financial counselor, who can help you review, understand, verify that everything is correct, and even request changes, where it is possible.

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