How to Read a Paycheck: Your Earnings and Deductions

Understanding a paycheck is fundamental to managing personal finances. This document details an individual’s earnings and all subtractions made from those earnings. It provides a clear record of how much money was earned, what deductions were taken, and the final amount received. Understanding this information is crucial for informed budgeting and financial planning.

Key Sections of a Paycheck

Most paychecks or pay stubs follow a standard format, providing essential information in clearly labeled sections. The top portion typically includes employee information, such as name, address, and an employee identification number. Employer information, detailing the company’s name and address, is also present.

Crucial dates are displayed, including the pay period start and end dates, which define the timeframe for earnings, and the pay date. If the payment is a physical check, a check number will also be listed for reference.

Understanding Gross Earnings

Gross pay represents the total amount of money an individual earns before any deductions are taken out. This figure is the starting point for all paycheck calculations. Various components contribute to gross earnings, depending on the employment structure.

For hourly employees, gross pay is calculated by multiplying the hourly wage by the number of hours worked, including any overtime hours which are typically paid at a higher rate. Salaried employees receive a predetermined amount per pay period. Other additions, such as bonuses, sales commissions, or shift differentials, are also included in the gross earnings calculation.

Decoding Paycheck Deductions

Deductions are amounts subtracted from an individual’s gross pay, leading to the net amount received. These deductions fall into two main categories: mandatory and voluntary. Their types and amounts vary based on individual choices, employer benefits, and applicable federal, state, and local laws.

Mandatory deductions include federal income tax, withheld based on information provided on an employee’s Form W-4. This form, or Employee’s Withholding Certificate, informs employers how much federal income tax to withhold based on factors like filing status and claimed dependents. Incorrectly completing this form can lead to under- or over-withholding, impacting potential tax refunds or liabilities at year-end.

Federal Insurance Contributions Act (FICA) taxes are also mandatory, funding Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% for employees, applied to earnings up to a wage base limit of $176,100. The Medicare tax rate is 1.45% for employees, applied to all covered wages with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 in a calendar year, which employers are required to withhold without a corresponding employer match. State and local income taxes are also mandatory deductions in many jurisdictions.

Voluntary deductions are those an employee chooses to have withheld from their pay. These can be pre-tax or post-tax. Pre-tax deductions, such as contributions to a traditional 401(k) retirement plan, health insurance premiums, Health Savings Accounts (HSAs), or Flexible Spending Accounts (FSAs), reduce an individual’s taxable income, lowering the amount of income tax owed. The IRS sets limits on how much can be contributed to these accounts on a pre-tax basis.

Post-tax deductions are taken after all applicable taxes have been calculated and withheld. Common examples include Roth 401(k) contributions, which offer tax-free withdrawals in retirement, union dues, or voluntary disability and life insurance premiums. Wage garnishments, which are court-ordered withholdings for debts like child support, unpaid taxes, or defaulted loans, are also post-tax deductions and are mandatory once ordered. Federal law limits garnishments for most debts to 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage, whichever is less, though child support garnishments can be higher, up to 50-65% depending on circumstances.

Net Pay and Year-to-Date Totals

Net pay, often referred to as “take-home pay,” is the amount an employee receives after all mandatory and voluntary deductions are subtracted from gross pay. This amount is directly deposited into a bank account or issued as a physical check, representing the final sum available for personal use.

Pay stubs also commonly display year-to-date (YTD) totals for various categories. YTD figures represent the cumulative totals of earnings and deductions from the first day of the calendar year up to the current pay period. This includes YTD gross pay, federal tax withheld, Social Security, Medicare, and other deductions like health insurance or retirement contributions.

YTD information is crucial for financial planning, allowing individuals to track annual income, expenses, and tax withholdings for tax preparation. Regularly reviewing these cumulative totals helps in budgeting and can highlight any discrepancies in payroll.