Dollars and Sense

All of us look forward to payday, but when was the last time you took a look at your pay stub? Whether you have been working for 20 years, or just starting at a new job its important to review and understand the numbers. It’s surprising how often people find accounting errors in their favor when they make sure they are getting what they deserve from their employer.

While most pay stubs may look complicated and are full of abbreviations there is information there as to where your money is being divvied up. It is your responsibility to know where it’s all going. If you get a raise, expecting overtime, have a change in health insurance, or are updating your personal contributions for retirement, it’s especially important to review the next few pay stubs to make sure that the changes are made and accounted for. The accounting department at your job is responsible to make these updates—but they are only human and errors are more common than you might think. If something isn’t adding up, be sure to bring it to their attention.

HOW MUCH YOU MADE:

Gross Income — This is the amount of money you earned during a pay period. You should keep track of the hours you work times the amount per hours you make (on an hourly wage) and make sure that these numbers match. Gross income may list combined overtime or overtime might be listed as a separate line item.

STATUATORY DEDUCTIONS:

Federal Tax (FED / FIT / FITW) — Federal Income Tax withheld. The percentage of this withdrawal is controlled by your income and filing status and is managed through the W-4 form you filled out which included deductions and any additional income withheld to cover your federal tax liability. If you have a life change or need to have more/less tax withheld ask your employer to update your W2.

State Tax (STATE / SIT / SITW) — State tax withheld. This is money withheld in the state in which you earned money. Be aware that if you work in multiple states you may need to set aside additional finances to cover other state tax liability. Some states also deduct local taxes.

Social Security (OASDI / FICA / SS / SOCSEC) — Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program is designed to replace a small percentage of a worker’s pre-retirement income based on their lifetime earnings. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% of your net income if you are self-employed.

Medicare (MED) — This is a required payroll deduction and provides health care to seniors and people with disabilities. The current Medicare tax rate is 1.45% of your wages. Your employer matches your contribution by paying another 1.45%. If you are self-employed, you have to pay the full 2.9% of your net income. Together Social Security and Medicare Taxes are often referred to as the FICA tax under the Federal Insurance Contributions Act.

VOLUNTARY DEDUCTIONS

Health Insurance — If your employer offers health insurance your payment toward the premium will be listed here. Make sure that the amount matches what your chosen medical health tier is supposed to cost, especially during yearly changes/enrollment.

Health Savings Account (FSA/HSA) — This is money that you voluntarily set aside tax free to help cover health expenses, medications, medical co-pays, etc. Review your health expenses on a yearly basis and adjust this amount as needed. Because it is taken out tax-free it saves you money on health costs.

401K — This entry notes how much you’re putting into your company sponsored retirement account. Your company may also offer alternative retirement or pension plans such as an IRA which would be listed as well.

Group Term Life Insurance — Some employers will offer a basic life insurance package to their employees at no expense, while offering the employee additional coverage for a fee. If you are paying for additional coverage it will appear here.

HOW MUCH YOU GET TO KEEP

Net Income — This is the final amount you get in your check after deductions, if there are no other additional withdrawals.

ADDITIONAL MONEY

Reimbursements — This could be for travel, meals, office supplies, or other expenses that you have charged back to the company. This is an item that you should check frequently to make sure that you have received all of the payments.

ADDITIONAL WITHDRAWALS (NOT TAX FREE)

Investments — If your company has a stock sharing plan or other investment options those will be listed as deductions from the Net Income.

Garnishment (GARN) — If your wages have been garnished, the withholding by your employer will be listed here.

Child Support/Alimony (CHSPPRT) — Child support payments garnished from your wages will be listed here.

Tax Levies (LV / LEVY) — If you owe the IRS back taxes they can garnish your paycheck. That will be listed here as well.

The long-term disability (LTD) — This deduction covers a percentage of wages for employees who are injured or too sick to work for an extended period of time. Short-term disability (STD) is often taxed in the same manner. This type of entry could include payments for Family Medical Leave as well if the employer offers that benefit.

Job Related Expenses — If your employer offers a meal plan, corporate purchase discount from your paycheck, uniform, union fees, or other billed expenses those will be listed here. Keep an eye on the amount and question any problems you may see. This is a common area for errors and some states prohibit these kind of deductions.

Why keep track?

Your employer’s tax estimates are just that—estimates. It’s up to you to keep track of deductions to make sure they’re accurate. If you find deduction or payment errors, you need to report them and fix them as soon as you can. Not doing so could land you with a higher tax bill or a loss of income due to accounting errors. You can use an online paycheck calculator to help you keep track.

Make sure all the information on your current pay stub matches your most recent W-2—if you move, update your address. Spot check your pay regularly to make sure you’re being paid properly for hourly work and overtime. If you see a mistake, contact your HR department.

A note to independent contractors:

There are thousands of individuals happily working as “freelance” or individual business owners managing their own time and income. These independent contractors are usually aware up front that they are responsible to cover their own tax and FICA liability and should make sure they are covering all of their bases.

However, some companies try to avoid federal and state legal requirements and list unwary new hires as ‘independent contractors’ placing tax withholding and liability responsibility on the individual without full disclosure. This means they don’t deduct taxes and are also not liable to pay overtime, protect from discrimination or offer time off under the Family Medical Leave act or Disabilities laws. They also don’t have to cover unemployment or worker’s compensation benefits. If you notice that your employer is not withholding taxes it’s a good sign that you have been hired as an independent contractor and should at minimum figure out your tax liability and start setting money aside. Your employer cannot simply call you an independent contractor to avoid federal and state legal requirements.

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