How to Make Sense of Your Pay Stub | Personal Finance

Every so often, Jenny Redes gets a call from an employee who has recently discovered their pay stub. They typically have questions about what all the various numbers mean, and the human resources professional says that’s understandable.

“It’s a lot of information,” says Redes, a Society for Human Resource Management certified professional and human resources manager with manufacturer Custom Profile in Walker, Michigan.

Deciphering your pay stub is an important skill that ensures you are properly compensated and have the information you need to create a budget. Keep reading for a rundown of everything you may find on your pay stub and what it all means.

Does My Employer Have to Provide a Pay Stub?

First, it should be noted that there is no federal law requiring pay stubs to be distributed to employees. “It does depend on which state (you’re) in,” says Erica Fine, director of human resources for law firm Shutts & Bowen LLP in Miami.

In a handful of states, such as Ohio and Georgia, there is no requirement for employers to provide workers with pay stubs or wage statements. However, the vast majority of states require employers to provide employees access to a pay stub, either electronically or as a physical copy. Eleven states require that a written or printed pay statements be provided.

To determine the legal requirements in your area, check with your state’s labor department or its equivalent agency.

Major Components of a Pay Stub

Regardless of its format, your pay statement may contain a mix of information required by state law and voluntary details included by your employer. Here’s a look at the most common information provided on pay stubs.

Not surprisingly, wages are a key piece of information found on pay stubs. Workers may find their hourly rate or salary along with their gross, taxable and net wage details. Pay statements may include both pay period and yield-to-date details.

While everything on your pay stub deserves your attention, be especially careful when reviewing wage information. “One of the most common errors that can occur with the payroll process is when an employee is paid at a higher or lower-than-normal rate of pay,” says Tim Speiss, partner in the personal wealth advisors practice for accounting firm EisnerAmper LLP .

Tax withholdings are another mainstay on pay statements. For most employees, these will include federal, state and local income taxes as well as FICA tax for Medicare and Social Security.

It’s not uncommon for young employees to see the mention of Medicare on their pay stub and do a double take, according to Fine. “They say, I don’t need Medicare,” she explains. However, Medicare and Social Security taxes are paid into the program to support those currently receiving benefits.

Workers also need to be aware that they may not pay taxes on everything they earn. “Taxable income is not the same as gross pay,” Redes says. That’s because some deductions – such as contributions to traditional 401 (k) accounts – are made with pre-tax dollars. “(It) can be very confusing,” Redes notes.

When reviewing your pay stub, confirm the correct amounts are being withheld at each level. Pay especially close attention to local income tax if your business has multiple locations but a local tax is only assessed in certain areas.

Many companies want their workers to know how much they pay on behalf of employees for perks such as insurance and retirement contributions. These expenses may be listed as separate line items. Workers may also find details such as their available paid time off.

Pay stubs may also reflect deductions for items such as parking passes, voluntary insurance benefits and contributions to retirement plans and health savings accounts.

For the most part, these deductions cannot be taken unless you’ve authorized them, Fine says. That means that if you don’t recognize a certain expense, it’s time to call the human resources department to confirm what it’s for and whether you agreed to it.

Other items on your pay stub may be unique to your employer.

“There are things we put on ours that are important to our employees,” Redes says. That includes items such as an employee’s hire date and their attendance points. These items aren’t required by law, but companies include them since they are details many workers want to track.

Why You Should Review Your Pay Stub

So long as the amount deposited into your bank account each pay period seems right, you may wonder why it’s necessary to review your pay statement. Human resources and finance experts say there are at least three reasons to do so.

The first is to confirm that your pay rate, tax withholdings and deductions are correct. “Mistakes happen,” Redes says. And identifying and correcting those errors quickly is much easier than trying to fix a problem that has been left to linger, such as withholding the wrong tax amount for months.

Next, looking at your pay stub provides a way to better understand how government decisions, such as those about tax policy and mandatory benefits, affect workers. “When (you) go out and vote, these decisions may have a direct impact on (you),” Fine says.

Finally, pay stub information can be vital for proper budgeting. Without the information on your pay stub, you may make the mistake of planning expenses based on your hourly wage or base salary. “This is not actually the amount you have to live off,” Fine says. Instead, a significant amount of your income may get diverted to taxes and other deductions.

What’s more, your pay stub offers information that can be important to your long-term financial stability, Speiss says. He encourages people to consider how much they are setting aside for needs such as retirement and discuss with an investment advisor how to make the most of this money.

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