Understanding Your Pay Stub – Where Does the Money Go?

by | May 31, 2019 | Financial Independence, Tax Planning

Understanding Your Pay Stub – Where Does the Money Go?

by | May 31, 2019 | Financial Independence, Tax Planning

Have you ever looked at your paycheck and wondered why the amount is so much less than you thought it would be? It certainly doesn’t equal your annual salary divided by the number of paychecks you get in a year. Where does all the money go?

Understanding the deductions printed on your pay stub – those amount that make the difference between your gross pay (salary) and your net pay (the check amount) – is an important step in your financial planning.

This is the first in a four-part series about your paycheck – what the various deductions mean, why you need to pay attention to them, tips on not having too much or too little deducted, and how to use all that information in your financial planning.

Let’s start with the basics – the standard financial information and deductions that appear on everyone’s paycheck.

Gross Pay. This is your salary for the pay period before deductions.

Taxable Wages. Not all paystubs show this amount, but it refers to the amount of earnings for the period that are taxable. Typically, this is your gross pay less any pre-tax deductions such as your pre-tax 401(k) contribution or pre-tax medical insurance premiums.

Federal and state income tax withholding. This is the amount of income tax your employer is required to withhold from your taxable pay for the period. The amount is determined by what you claimed on your W-4 form – marital status and exemptions – when you started your job. The more exemptions claimed, the less money withheld.

NOTE: This is where you may get into trouble by not having enough withheld and ending up having to pay when you file your taxes. It’s a good idea to do a review of your withholding mid-year and make any adjustments necessary. This is where we come in. We can help you avoid any unwelcome surprises at tax time.

Social Security tax (also referred to as OASDI or FICA tax). OASDI (Old Age Survivors and Disability Insurance) or FICA (Federal Insurance Contributions Act) helps fund the Social Security program, which provides benefits to retirees, the disabled and children. Your employer is required to withhold this tax from your gross earnings until those earnings reach the annual threshold. For 2019, employers are required to withhold 6.2% of your gross wages for Social Security tax until your earnings reach $132,900. (Your employer makes a matching payment for you). Self-employed individuals pay the tax at 12.4% until they reach the earnings limit. As you work and pay the tax, you earn credits for Social Security benefits.

NOTE: If you work for more than one employer during a year and your combined earnings are more than the annual OASDI limit, you may end up overpaying the tax. If so, there’s a space on your income tax return that you can use to claim excess OASDI paid, giving you a refund of the overpaid amount.

Medicare is withheld at 1.45% of all taxable wages and is used to fund the Medicare program. The employer matches this amount for a total of 2.9%.

Medicare Surtax is an additional tax used to fund the Affordable Care Act and is withheld after your taxable wages exceed $200,000. The rate is 0.9% of taxable wages.

CA SDI (California State Disability Insurance) is withheld by employers to fund short-term disability income replacement. The California State Legislature sets the percentage and earnings threshold, which may change every year. For 2019, employers are required to withhold 1% of SDI taxable earnings up to $118,371.

401K is a pre-tax deduction that you set up through your employer to put money away for your retirement.

NOTE: What’s important to look for here is to make sure your deductions over the year will equal the maximum contribution allowable for the current tax year.

Medical, Dental, Vision. These deductions, typically pre-tax, are your share of the premiums for your company’s medical insurance plan.

AD&D (Accidental Death & Dismemberment) insurance may be paid by your employer, or it may be partially withheld from your paycheck.

YTD (Year to Date) These are your year-to-date earnings and deductions. You may want to check your last pay stub of the year against your W-2 form for the year to ensure they align.

Net pay. And this, at last, is the actual amount you to take to the bank.

Tune in next time when we’ll talk about the parts of your pay stub that relate to stock options.

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Jackie Kleinman, CFP™, is the principal of KB Financial Advisors. Jackie started her career in financial planning in 1996 at an insurance and brokerage firm. She enjoyed the client interaction, but was bothered by the conflict of interest inherent in commission planning. In 2002, as an advocate of fee-only planning, she opened her doors to assist clients in growing their wealth and enhancing their lifestyles by combining investment advice, taxes and setting each individual’s priorities and goals.


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