How to Read Your Pay Stub: Gross Pay to Net Pay

A pay stub is a formal record of an employee’s earnings and deductions for a specific pay period. It provides a transparent breakdown of how gross wages become the net amount deposited into a bank account. Understanding this document allows individuals to verify compensation, track tax withholdings, and monitor benefit contributions. Regularly reviewing your pay stub helps ensure accuracy and effective financial planning.

Key Sections of a Pay Stub

A typical pay stub presents several distinct categories of information. It usually begins with identifying details, including the employee’s name and address, along with the employer’s name and contact information. The pay period is clearly stated, indicating the start and end dates for wages earned, alongside the payment date.

The earnings section details all forms of compensation received before any subtractions, such as regular hours worked, overtime, or special payments. This is followed by a section outlining all deductions, which are amounts withheld from gross earnings for taxes, benefits, or other purposes. The net pay, representing the actual take-home amount, is prominently displayed. Many pay stubs also include year-to-date (YTD) totals, showing cumulative amounts for earnings and deductions since the beginning of the calendar year.

Understanding Your Gross Pay

Gross pay represents the total amount an employee earns before any deductions or taxes are subtracted. It is the full compensation for services rendered during a specific pay period. Regular wages or salary constitute the primary portion, reflecting the agreed-upon hourly rate or fixed amount for the standard workweek. Overtime pay, typically calculated at 1.5 times the regular rate for hours worked beyond 40 in a week, also adds to gross earnings. Bonuses, commissions earned from sales, and tips received in service industries are other common additions that increase an employee’s total gross compensation.

Decoding Your Deductions

Mandatory Deductions (Taxes)

Mandatory deductions are amounts required by law to be withheld from gross pay, primarily for various taxes. Federal Income Tax (FIT) is withheld based on information provided by the employee on Form W-4, which directs the employer on how much tax to deduct. The amount withheld depends on factors such as filing status and dependents.

State Income Tax (SIT) is also withheld in most jurisdictions, with specific rates and rules varying by state. Local Income Tax (LIT) may be withheld in certain cities, counties, or school districts. Federal Insurance Contributions Act (FICA) taxes fund Social Security and Medicare programs.

Social Security tax is withheld at a rate of 6.2% from an employee’s gross wages, up to an annual wage base limit ($168,600 for 2024 and $176,100 for 2025). Medicare tax is withheld at 1.45% from all gross wages, with no wage limit. An Additional Medicare Tax of 0.9% applies to wages exceeding certain thresholds, such as $200,000 for single filers or $250,000 for married individuals filing jointly.

Voluntary/Pre-Tax Deductions

Voluntary pre-tax deductions are amounts an employee chooses to have withheld, which reduce their taxable gross income before income taxes are calculated. Health insurance premiums are a common pre-tax deduction, lowering the amount of income subject to federal, state, and FICA taxes. Contributions to retirement plans, such as a 401(k) or 403(b), are also typically pre-tax, allowing earnings to grow tax-deferred until retirement. For 2024, an employee can contribute up to $23,000 to a 401(k), with an additional catch-up contribution of $7,500 allowed for those age 50 and older.

Flexible Spending Accounts (FSAs) allow employees to set aside pre-tax money for eligible healthcare or dependent care expenses. For 2024, the health care FSA contribution limit is $3,200. Health Savings Accounts (HSAs) are another pre-tax option for individuals with high-deductible health plans to save for medical expenses. For 2024, the HSA contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those age 55 and older.

Voluntary/Post-Tax Deductions

Voluntary post-tax deductions are withheld from pay after all applicable taxes have been calculated and deducted. Contributions to a Roth 401(k) are examples of post-tax deductions, meaning qualified withdrawals in retirement are tax-free. The annual contribution limits for Roth 401(k)s are the same as for traditional 401(k)s.

Loan repayments, such as for a 401(k) loan or other employer-sponsored loans, are also typically deducted post-tax. Other common post-tax deductions include union dues or charitable contributions made directly through payroll.

Calculating Your Net Pay and Other Important Details

Net pay is the final amount an employee receives after all deductions have been subtracted from their gross pay. It is calculated as Gross Pay minus Total Deductions. This is the actual take-home amount, typically deposited into a bank account or issued as a physical check.

Pay stubs often include Year-to-Date (YTD) totals, which provide a cumulative summary of earnings and deductions from the start of the calendar year. These totals are helpful for tracking annual income for tax planning and verifying annual contributions to retirement accounts or other benefits. YTD figures allow employees to monitor their financial progress throughout the year without waiting for annual statements.

Employer contributions, while not deducted from an employee’s pay, may also appear on a pay stub to show the total compensation package. This includes the employer’s portion of health insurance premiums, matching contributions to a 401(k) plan, and employer-paid taxes like Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). FUTA is a federal tax on the first $7,000 of an employee’s wages, typically at a net rate of 0.6% after credits for state unemployment taxes. SUTA rates vary by state and are also employer-paid, funding state unemployment benefit programs.

Pay stubs often display accrued leave balances, such as vacation, sick leave, or paid time off (PTO), showing how many hours or days an employee has earned and used. Administrative details, like an employee identification number, specific pay rate, and direct deposit bank account information, also appear on the stub.