Have you noticed your paycheck stub seems to be getting as complicated as your telephone bill? While it is important to understand both, someone else will have to write an article on how to understand your telephone bill! Allow us to assist you in getting back to the basics by simplifying your paycheck stub and what it represents to you.
Understanding your payroll check stub should be the first step in cash management. You should review your check stub each pay date for accuracy. The following provides you with an overview of the information that may appear on your check stub with an explanation of its importance.
Identification Information
The payroll check stub will have identification information such as your name, address, Social Security number and often an internal employee identification code assigned by your company. This information is used to produce your annual W-2 and will be used to complete your income tax return. Your name should be the same as it appears on your Social Security card. This allows the Social Security Administration to properly match your earnings to you. It is important for your Social Security number to be correct. Your Social Security, medicare and unemployment taxes are paid to the government using this number.
Time Periods
Generally your check stub will reflect a period ending date, and a pay date. The pay period will be consistent with your company’s payroll policy, such as, weekly, semi-monthly, or monthly. It is important to recognize that the tax withholding information you give your employer is for all paychecks. If you normally receive a monthly payroll check, you would not want to use the same tax withholding to produce a quarterly bonus check or a week’s vacation pay. Prior to the creation of the check, you should discuss withholding taxes with your payroll department. You should definitely discuss taxes for any payroll checks you receive that do not follow the normal payroll period.
Types of Pay
Typically, there are two types of payroll: salary and hourly wage. Some employers offer nonqualified stock options that increase your W-2 income when exercised.
Salaried payroll is payment using a specific annual dollar amount. It is divided by the number of pay periods per calendar year to calculate the gross salary per pay period. Hourly wage is payment using a specific hourly rate of pay for each hour worked. The overtime hourly rate will be one and a half times the regular hourly rate for any overtime hours worked. The hourly rate is multiplied by the hours worked to calculate the gross wage for the pay period.
The check stub will show the different types of pay, such as, regular salary or wages, vacation pay, holiday pay, sick pay, bonus, commission, etc. If you are paid an hourly wage, the amount of hours and your hourly pay rate will be shown, with any overtime hours separated from regular hours.
Earnings
The check stub will reflect the earnings and deductions for both the pay period and year-to-date. The figures in the year-to-date column will include the current pay period payroll payment. All types of earnings will be totaled to reflect the total gross pay. The gross pay minus your deductions will be your net payroll check amount. Your net payroll check amount is your “bring home pay.”
Tax Deductions
The taxes deducted from your paycheck should be listed separately for federal income tax, state income tax, Social Security tax, medicare tax and any applicable local income taxes. Federal and state income tax withheld is based on marital status, the allowances you claim, the payroll payment frequency and the federal and state tax tables.
You indicate your marital status and choose the allowances by completing the federal and state Employee’s Withholding Allowance Certificate: Federal Form W-4; State Form for Georgia: Form G-4. This information is often displayed on the check stub.
Social Security and medicare taxes are a set percentage of your gross earnings. Social Security tax has an annual cap on taxable earnings that changes each year. In 2012, the first $110,100 of earnings are taxed for Social Security at 4.2% through February 2012. In March 2012 it will revert to its normal rate of 6.2% for employees, ending a year-long temporary reduction in the rate. Medicare taxes are 1.45% on all earnings.
Other Deductions
In the Other Deductions category you will have items that you have authorized your employer to deduct from your paycheck. While some types of deductions can be exempt from federal and state income taxes, Social Security and Medicare are not exempt. We recommend that you review with your human resources department which benefits offered to you can be excluded from federal and state taxable wages. Some check stubs show which deductions are excluded from federal and state taxable wages.
Some examples of other deductions are: medical insurance, dental insurance, supplemental accidental death & dismemberment insurance, charitable contributions, dependent life insurance, pension loan repayments, pension contributions, deferred compensation, dependent care and/or health care savings plan(s), any applicable expense reimbursements to your employer, and any applicable court ordered deductions such as child support.
If you have elected to have your employer deduct benefit payments from your paycheck, you should make sure that these deductions are not taken from any additional paychecks you might receive. For example, if you are paid twice each month and dental insurance premiums are deducted from your paycheck, there is no need to deduct the premiums from any additional check you might receive, such as a bonus check. The total insurance deductions for each calendar month should equal the monthly insurance premiums you have elected.
Other Information and Benefits
Your check stub can include information on benefits, such as, vacation time or sick/personal time remaining. The check stub information on benefits is determined by your company and the type checks used. Some employers have the capability of including information or instructional notes on each check stub to individual employees. A number of employers offer employees payroll direct deposit. If your employer offers this benefit, your direct deposit check stub may show your bank account number(s) on it.
What Should I Look For?
Review your check stub for accuracy and for the following:
- Did I receive the pay increase I was expecting at the appropriate time?
- Did I receive the additional benefit time (vacation, sick, etc.) I was due at the appropriate time?
- Are the withholding taxes reasonable now that I have received a pay increase, or do I need to adjust my withholding?
- Were the benefit deductions (i.e., additional life insurance, etc.) I elected taken from my paycheck at the appropriate time?
- Did my paycheck reflect the appropriate hourly wage rate and hours due to me?
- Do I need to notify the human resources department of any changes in my personal information?
- Now that I have received a pay increase, can I afford to increase my pension contribution?
- Do I need to ask my employer for a raise? (Good Luck!)
- Since I received an income tax refund from the government, do I need to reduce the taxes withheld from my paycheck?
- Since I owed income taxes when I filed my income tax return, do I need to increase the amount of taxes withheld from my paycheck?
- Has the payroll department made the changes that I requested?
- Are my earnings and benefits competitive in the industry for my job position in my area?
- Did I receive verification of the earnings statement on any nonqualified stock options I exercised reflecting the proper amount will be added to my W-2?
- Do I need to update my personal budget since I received a pay increase?
- Has my income dramatically changed since the last time I reviewed my income with my tax adviser?
- Do I need to notify my tax adviser of the change in my income for current year tax projections and planning?
- If I received an additional paycheck, were deductions for my benefits incorrectly withheld?
- Can I authorize my employer to directly deposit a set amount each pay period into my savings account, with the remaining amount going into my checking account?
Recordkeeping
Do I need to keep every pay stub? Generally, there is no need. Remember each pay stub has your year-to-date information reflected on it. We recommend that after you review each pay stub you keep the previous four pay stubs. This will give you the information you need when requesting credit.
Always keep your last pay stub of each calendar year to compare to the W-2 you receive. If you are able to carry forward any benefits time, such as vacation time, you should compare the first check stub of the new year to the benefits time listed on the last check stub of the previous year.
Benefits
Understanding your payroll check stub will enable you to properly budget, and make important tax planning decisions. The bottom line on this is more money in your pocket! For more information regarding this topic or any other tax-related issue, please call Henssler Financial at 770-429-9166 or at experts@henssler.com
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
