Your Paycheck: What It Tells You


Getting a regular paycheck? It’s a great feeling isn’t it. You are now able to make purchases on your own without the help of your parents. But, your paycheck isn’t as much as you thought, is it? Welcome to the working world.

Curious as to where some of your earned income is going and what the rest of the stuff on your paycheck means? Educating yourself on how to read your pay stub and understanding the information it contains can play an important role in effective money management and proper budgeting. Knowing where your money is going can help you stay on top of your finances and make the most of your hard-earned paycheck.

  • Gross Pay: Includes the total amount of income that you earned during a particular pay period. A pay period is determined by your employer, but is typically bi-weekly or monthly. This figure does not factor in tax withholdings.
  • Net Pay: Includes the amount of income that you actually take home after all withholdings have been applied. It is the amount of money that you take straight to the bank!
What is deducted from my paycheck?
Federal Income Taxes
The federal government gets a piece of your income each and every paycheck. The amount of money withheld for federal taxes depends on the amount of money that you earn and the information that you gave your employer when you filled out a W-4 form or Employee’s Withholding Allowance Certificate. On a W-4 form, you may make allowances for yourself, your spouse, and your dependents. For every allowance that you take, less money gets withheld for federal taxes and more money gets added to your paycheck. Take fewer allowances and a bigger chunk of your income will be withheld for your federal taxes.

State Taxes
Depending on where you live, you may or may not be required to pay a state income tax. As with federal taxes, money for state taxes is withheld with every paycheck.

Social Security
The federal government requires every working American to contribute a portion of their paycheck to Social Security, a system of supplemental retirement programs established in 1935. Every worker contributes 6.2 percent of their gross income directly into the Social Security fund, and every employer chips in an additional 6.2 percent for each employee. The Social Security fund provides benefits to current Social Security recipients.

The federal government requires every working American to contribute to Medicare, a U.S. government insurance plan that provides hospital, medical, and surgical benefits for Americans age 65 and older and for people with certain disabilities. Every worker contributes 1.45 percent of their gross income to Medicare and every employer chips in an additional 1.45 percent on behalf of each employee.

These federal and state withholdings account for much of the difference between your gross income and net income (or take-home pay). But there may be other deductions as well, depending on the programs that you sign up for with your employer.

If you signed up for medical, dental, or life insurance through your employer, your contributions to these plans will be deducted from your pay.

Retirement Savings Plans
Contributions to retirement savings plans such as a 401(k) plan will also be deducted from your pay. When you sign up for a 401(k) plan, you select a percentage of your pre-tax salary that you’d like to contribute to the retirement account. If you choose 5 percent, than 5 percent of your pre-tax pay will be contributed to your retirement account.

Flexible Spending Accounts
A flexible spending plan allows you to set aside pre-tax dollars for medical expenses including health insurance copayments and deductibles and prescription drugs. Contributions to a flexible spending account are deducted from your pre-tax income.


If you need further explanation on how to read your paycheck stub or if a particular calculation doesn’t seem correct, consult your Human Resources Department for assistance. Don’t procrastinate! Exercise good money management skills by being proactive. If a calculation is incorrect, the issue may reappear on every paycheck. Also, you may not be making the best choice for a retirement plan contribution, or losing money if your earnings are not calculated properly. It is ultimately your responsibility to ensure that you are being properly compensated.


Until Next Time,

Jessica M.

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