Your pay stub offers a lot more information than the money you take home. A deeper look at the pay stub will help you understand what you spend on taxes, various benefits, and other types of deductions.
We’re here to help you understand how to read a pay stub because, sometimes, it seems like reading a pay stub is an art!
5 Tips for How to Read a Pay Stub
A pay stub summarizes how your earnings are distributed. This type of information includes the amount spent on taxes and benefits, and what is paid to you after the deduction of taxes and education.
And don’t worry! As a business owner, you don’t need to know how to create pay stubs yourself. There’s plenty of software out there to generate them for you … find it here!
1. Understand Gross vs. Net Pay
The earning section of your pay stub shows you the pay period, your overtime, and your gross and net pay.
Gross pay is the total amount of income you’ve earned during the pay period. It’s the amount before deductions and taxes. You should make sure that this amount is the same as the salary you’ve agreed on with your employer/employees.
Net pay is the amount you receive as income after taxes and deductions. This is the amount you receive as a direct deposit.
2. Pay Attention to Your Deductions
The deductions listed on your pay stub are the difference between your gross and net pay.
It’s vital to remember that you are responsible to report any errors in your deductions, so pay special attention to it. The last thing you want is an error during several pay periods. Ask your HR if there are any doubts!
3. Voluntary vs. Mandatory Deductions
There are two types of deductions: the mandatory ones that you pay by law and the voluntary ones that you choose to pay additionally.
The mandatory deductions include:
- Federal income tax
- State income tax
- Social security tax
- Medicare tax
The voluntary deductions include:
- Health insurance premiums
- Retirement account contributions
- Flexible spending accounts
- Commuter benefits
4. Understand the Three Types of Taxes
It’s important to understand where you’re paying for taxes. The federal tax is based on how much you earn. The state tax is dependent on the policies of your state. The local tax is quite rare but can apply to certain cities and districts. It’s important to double-check whether you’re being deducted the right tax amounts.
5. Know Your Deduction Codes
There are quite a few deduction codes that appear on the pay stub. It’s useful to understand what they mean. The most common codes include the 401K for retirement saving contributions and the 401K ER, which is an employer’s contribution. However, there is plenty more that you should be aware of!
No More Confusion About Pay Stubs
We hope that these tips help both employees and business owners how to read a pay stub and how to extract useful information. It’s not only what you’re paid that it’s important to know. All the rest of the information helps you understand how your income is distributed and will help you budget accurately.
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