Understanding your paycheck
Jan 20, 2014
From employers to employees, I get many questions when it comes to a paycheck. Overwhelmingly people do not understand what their paycheck says. As a payroll professional, I feel it is my duty to answer some questions I hear on regular basis.
Q: What are ‘gross pay’ and ‘net pay’?
A: Gross pay is the total amount of wages earned for the pay period including overtime and bonus pay. Net pay is your ‘take-home pay’. It’s your gross pay minus all deductions and all federal, state and local taxes.
Q: What are all these different amounts deducted from my pay?
A: Your pay stub shows how much money was subtracted from your paycheck to pay for: federal income tax, state and local income taxes, FICA taxes and possibly pre-tax and after-tax deductions.
-Federal income tax is an estimated amount you will owe the federal government. When you file your tax return before April 15th there may be more money you owe or be refunded a portion.
-State income taxes are a required deduction in 41 states. Local income taxes are comprised of county, city or school district and can be another deduction.
-FICA stands for Federal Insurance Contributions Act. It refers to Social Security and Medicare taxes that are deducted from your pay.
-Pre-tax deductions are contributions to your retirement savings or medical plans.
-After-tax deductions can be involuntary which include unpaid taxes or child support orders, for example. Additional after-tax deductions can be made for charitable contributions which would be a voluntary deduction.
Q: I always get a big refund check from the government after I file my income tax return. It’s a good thing, right?
A: A large refund indicates you may be claiming too few withholding allowances on your W-4. If that is the case, you are giving the government an interest-free loan each year. Review your W-4 to make sure you’ve claimed the proper number of withholding allowances.
Q: Is there any way to reduce the amount of income tax I pay?
A: You can take full advantage of pre-tax deductions (retirement, health insurance) which can reduce your income taxes and increase your take-home pay.
For more information related to your paycheck, including Forms W-2 and W-4, contact us today.
