Understanding Your Pay Stub

When payday rolls around, most people focus on what they deem as the most important part of their paystub, their net pay.  Many people tend to glaze right over the rest of the stub, which contains very valuable information.  When it comes down to it, your average worker does not know how to interpret the information provided on the stub, simply because it’s never been explained to them.  This goes for business owners as well, who often have a tough time deciphering which taxes are withheld on behalf of the business and which are held for the employees.  Here, we will provide a quick guide to help both employees as well as their employers to comprehend all the information provided by our paychecks.

Every company has the right to modify their paystubs to best suit their employees, with the exception of certain line items that are required by law.  And every state has different laws dictating which items must be included, for example, here in North Carolina, workers have a right to a statement for every pay period that shows itemized deductions to the pay.  This includes, but is not limited to, garnishments, 401K, medical insurance, and child support.  These are some of the more standard deductions that employees see in their pay stubs.  Taxes, both employee and employer, are also listed on your paystubs.

The two most important items to most employees are their gross and net income.  Your gross income is defined as the amount of total income that you received during a particular pay period.  This amount does not have taxes and other deductions removed from it.  Your net pay is what you will actually take home for that pay period, as the proper taxes, deductions, and contributions have been removed at this point.  Deductions and contributions include but are not limited to, medical and dental insurance, 401k, Family Medical Leave Act (FMLA), vacation, and reimbursements.

Another important aspect of your paystub, and by far the most hated, are your taxes.  Payroll taxes include federal income tax, Social Security, and Medicare, as well as any state and local taxes where the business is located.  In addition to payroll taxes, employers are required to pay an unemployment tax on the federal and state level.  To pay taxes, a business must first obtain a Federal Employer Identification Number or FEIN.

Federal income tax (FIT) is a tax collected by the IRS on annual earnings of individuals, corporations, trusts, and other legal entities.  This tax is applied to all forms of taxable income, which is the gross income of an individual or corporation minus permissible tax deductions.   So, any type of income that fall under taxable income, must be reported to the IRS.

Most states also have state income tax (SIT), other than Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.  Each state determines its set of deductions and credits as it pertains to SIT.  Federal and state income tax are applied to the national defense program, veterans, foreign affairs, social programs, community development, law enforcement, and interest on national debt.

Social Security Taxes, commonly referred to as FICA (Federal Insurance Contributions Act), provide retirement benefits, benefits for dependents of retired workers, and benefits for the disabled and their dependents.  The tax was enacted in 1935 as a measure to ensure workers, who had spent their live gainfully employed, would have something to retire with.  Most working adults had a very difficult time saving money, as they still do to this very day, so the government stepped in to aid, simply in the form of a program that the employee is required to pay into.  This tax is paid by employees and employers.

Medicare taxes are paid by both the employee and employer, to cover the medical benefits for people over 65 years of age.  The tax rate is 2.9%, half of which is deducted from the employees’ paycheck and the other half is covered by the employer.  Medicare benefits extend to workers, retired workers, and the spouses of workers, all upon reaching the age of 65.

Federal unemployment taxes or FUTA, is a tax paid by the employer only, which provides compensation to individuals who have lost their jobs.  The tax rate for FUTA is 6.2% based on the first $7,000 paid as income to every employee.  Similarly, state unemployment tax or SUTA (and sometimes SUI), pays on the same premise, with each state setting its own taxable wage base.  This differs from the federal taxable wage base, which is $7,000.
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