Taxing Matters: Parts of a Pay Stub

Employees go to work, get paid, and the government takes their portion before employees ever see it. From their standpoint, it’s not uncommon to wonder, “What are the parts of a pay stub?” and “Why is there so much money deducted from my paycheck?” All of these questions – and the absence of their hard-earned cash – might even have them looking a whole lot like this guy.

As a payroll provider, we get it. The sticker shock of payroll taxes can be pretty alarming for employees. So, as part of National Payroll Week, I thought I’d lend a hand in helping your employees understand the why, where and to whom their money is going each pay period.

That’s right, in this edition of Taxing Matters, I’ll break down the love/hate relationship employees have with their pay stubs by outlining the most common things they’ll see reflected, from pay types to withholdings and deductions.

Common Parts of a Paystub

1.) Gross Pay – Your gross pay is the total amount of money you earn each pay period before taxes. This is different from net pay (explained below). If you’re feeling ambitious, you can easily calculate your gross pay with this tool, but keep in mind it won’t be the amount of money you take home next pay day because it doesn’t include any deductions.

2.) Net Pay –After all deductions have been made, this is what you actually get to take to the bank.

3.) Federal Withholding – To put it simply, the Federal Government requires all income be taxed based on the withholdings noted in your W-4 and the amount you earn. To determine how much you should have your employer withhold on your behalf, you calculate your total allowances based on your marital status and number of exemptions. Based on the allowances you report on your W-4, your employer then calculates the appropriate taxes by either the percentage method or the wage-bracket method which is outlined on page 43 of the IRS’s Publication 15.

4.) Social Security –This employment tax – part of FICA (Federal Insurance Contributions Act) – is designed to provide benefits for retirees, the disabled and children of deceased workers. Both you and your employer pay into this tax and are required to pay 6.2 percent withheld on wages up to $118,500 for 2015 totaling 12.4 percent for the year. If you reach that limit, you won’t see any Social Security tax withheld for the rest of the year. However, it does reset in January, so you’ll see that extra tax deduction again with the new year.

5.) Medicare – The Medicare Tax is also part of the FICA. Similar to the Social Security Tax, you are required to pay part of the tax and your employer is required to pay the other. Together, you and your employer are responsible for a flat rate of 1.45% withheld on all wages totaling 2.9 percent.

6.) State Withholding – Unless you are lucky enough to live in one of the nine states that do not have state withholding, this will be another tax deduction on your paycheck. Unlike Federal Withholding Taxes, there is no standard. Some states follow withholding tables, some states have flat rates, and some are a percentage of federal tax. Additionally, if you live in one state and work in another, you may get the luxury of the two states having a reciprocal agreement. This helps you avoid paying taxes to your resident state while waiting for a refund from the non-resident state.

8.) Local Taxes – If you’re in a state that has local taxes, you’ll have to have those deductions as well. Rates vary and like Investopedia mentions, these taxes are, “assessed and levied by a local authority such as a county or municipality.”

9.) Voluntary Deductions – Voluntary deductions are anything that you, the employee, elect to pay for such as health benefits, life insurance, disability insurance, and any other optional fringe benefits. As The Houston Chronicle’s Small Business section explains, “Although employers are not required by law to offer benefits, the federal and state government may have policies that affect these deductions. For instance, employers must typically establish a written policy and obtain an employee’s written authorization to deduct for health insurance and retirement plans.”

10.) Involuntary Deductions – In addition to federal, state and local withholding deductions, some employees may have things like garnishments and child support taken out of their paychecks. Usually these deductions are legally binding and mandated by the courts or government agencies. A few examples can be found here.

For additional information on your state’s taxes that may not be listed above please visit the U.S. Small Business Administration.

Learn how our payroll and tax filing software ensures your HR department stays compliant, accurate and timely.


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