• Ryan P. Cleary

Float Finance 3.2: Understanding Pay Statements



In this article we cover the common parts of a pay statement (also called a pay stub).


Float Finance is a series of accessible articles, tools, and resources designed to empower early career employees and students to navigate their financial journey.


Understanding Your Pay Statements

Reading your pay statement helps you monitor it for accuracy and track your pay which helps you make sure there are no mistakes.


A pay statement may be called an earnings statement, pay stub, a pay slip, or something else.


Information on a typical pay statement may include:

  • Your personal information

  • The pay period

  • Your pay date

  • Gross pay

  • Deductions

  • Net pay

  • Employer contributions

  • Balances for personal time off, vacation, and/or sick leave

Deductions

Deductions are funds removed from your paycheck before you receive it. Required deductions usually include:

  • Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare

  • Federal income taxes

  • State and local income taxes (if applicable)

Elective or voluntary deductions may include:

  • Insurance premiums

  • Union dues

  • Charitable contributions

  • Allotments to a savings plan such as an HSA, 401k or retirement account

Income Tax Withholding

Your employer will provide you an Internal Revenue Service (IRS) Form W-4, and possibly a similar form from your state or community. You fill them out and return the completed forms to your employer.


You will indicate:

  • Your withholding allowances

  • Additional amount to be withheld, if any

  • If you are exempt from withholding

Fewer allowances means a higher amount will be withheld for taxes. More allowances means a lower amount will be withheld for taxes. Be careful not to have too little withheld for taxes. If you don’t pay enough tax throughout the year, you may have to pay a penalty. You can view Form W-4 and detailed instructions for completing it by visiting IRS.gov and searching for "W-4."


What if you have More Than One Job?

Sometimes people have more than one job such as a full-time job and a part-time job, or two or more part-time jobs, or even two or more full-time jobs. If you work this way, be sure you understand how you are being paid. You can ask the employer if you will be considered a “W-2 employee” or a “1099 independent contractor.”


  • If you receive a Form W-2, the employer considers you to be an employee.

  • If you receive a Form 1099-MISC, the employer considers you to be self-employed.

As a contractor, you may be responsible for paying taxes yourself. Making these tax payments on time is important since it helps you avoid penalties and make sure that you are not surprised at tax time about what taxes you owe. You may also need to give more thought to how you are putting money aside for the future, including for retirement.


Tracking Your Income

Many people receive income from multiple sources. Making a list of your sources of income helps you plan how you will save, share, and spend it.

Income can be:


· Regular: you receive it consistently on a schedule

· Unpredictable: you receive it inconsistently

· Seasonal: you only receive it certain times of a year (such as holiday work)

· One-time: you only receive it once, like a gift

Keeping in mind whether each source of income is regular, unpredictable, seasonal, or one-time can also help you plan how you will save, share, and spend it.

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