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Taxing Matters: Parts of a Pay Stub

Do your employees understand the information included on their pay stubs? There’s a good chance that they don’t. 

Key points:

  • Employers should not assume their employees understand what’s on a pay stub.
  • Understanding what’s included on a pay stub can help to catch payroll errors before they become a more significant issue.
  • Common parts of a pay stub.

As an employer or HR professional, it’s a mistake to assume employees understand each part of a pay stub. To some, deciphering a pay stub might feel like learning a new language, or working through a complicated math equation. If an employee doesn’t understand what they are looking at, each number and letter included might as well be gibberish. 

Transparency between employer and employee (or HR department and employee) plays a significant part of building a healthy long-term relationship. Ensuring that your employees understand their paychecks is an integral part of building trust. It also helps employers (and employees) catch payroll errors before they become a more significant issue. 

Keep reading if your employees are asking questions like “What are the parts of a pay stub?” or “Why is there so much money deducted from my paycheck?”   

Common parts of a pay stub:

  1. Gross Pay – This is the total amount of money earned each pay period before taxes and deductions are taken out. This is different from net pay (more on that below). Ambitious employees can easily calculate gross pay with this tool, but they should understand that the number will change based on the deductions selected. 
  2. Net Pay – This is what an employee actually takes to the bank after all tax withholdings and deductions have been made.
  3. Federal Withholding – The Federal Government requires all income be taxed based on the withholdings noted in an employee’s W-4 and the amount earned. Employees must calculate their total allowances based on marital status and the number of exemptions to determine how much an employer should withhold on their behalf.  Additional Resource: the IRS withholding calculator for employees. 
  4. Social Security – This employment tax is part of FICA (Federal Insurance Contributions Act) and provides benefits for retirees, along with disabled individuals and the children of deceased workers. Both employer and employee contribute to the Social Security tax and are required to pay 6.2% withheld on wages up to $132,900 for 2019 (for a yearly total of 12.4%). When an employee reaches this limit, the Social Security tax is not withheld for the remainder of the year. The tax resets in January; employees will notice the extra tax deduction beginning again in the new year. 
  5. Medicare – The Medicare Tax is also part of FICA. Similar to the Social Security tax, employees are required to pay a portion of the tax and employers must pay the remainder. Together, employee and employer are responsible for a flat rate of 1.45% withheld on wages totaling 2.9%. 
  6. State Withholding – Excluding the nine states that do not have State Withholding Tax (look below for the full list), this is another deduction represented on an employee’s paycheck. Unlike Federal Withholding Taxes, State Withholding taxes are not standardized. Some states follow withholding tables, others have flat rates, and several states use a percentage of federal tax. Additionally, employees who live in one state but work in another might have the luxury of a reciprocal agreement. This helps individuals avoid paying taxes to their resident state while waiting for a refund from the non-resident state.
  7. Local Taxes – If the state in which an employee resides includes local taxes, the deductions will appear on the employee’s pay stub. The rates vary as these taxes are, in the words of Investopedia, “assessed and levied by a local authority such as a county or municipality.”
  8. Voluntary Deductions – Voluntary deductions are anything that an employee elects to pay for. This includes things like health benefits, life insurance, disability insurance, or other optional fringe benefits.
  9. Involuntary Deductions – In addition to federal, state, and local withholdings, some employees may have things like garnishments and child support taken out of their paychecks. These deductions are often legally binding and mandated by the courts or a government agency. 

The nine states with no income tax:

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming

Common pay stub abbreviations:

  • Gross: Employee earnings before all tax withholdings and deductions
  • Net: Employee earnings after all tax withholdings and deductions have been taken
  • Current: Pay period earnings 
  • YTD: Year-To-Date
  • REG: Regular hours worked
  • HOL: Holiday hours worked
  • VAC: Paid vacation time
  • SICK or FL: Sick or family leave
  • FICA: Taxes specific to the Federal Insurance Contributions Act 
  • MED: Medicare 
  • FED: Federal Withholding Income Tax deductions
  • SWT or State: State Withholding Tax deductions
  • LT or Local Tax: City and/or County Withholding Tax deductions
  • WC or Work Comp: Worker’s Compensation contribution
  • INS: Deductions for insurance 
  • Life: Deductions for life insurance
  • 401k or Ret: Retirement contributions
  • GARN: Ordinary wage garnishment 

Are you an HR professional or business owner looking for ways to streamline the management of payroll for your business and employees? Schedule a demo of SentricHR and learn how our software can help take the pain out of payday. 

Note: the information contained in this blog is not tax advice. Tax rules and regulations change often and can vary by location and industry. Please contact a tax professional for guidance.