Understanding Your Pay Statement

You’ve landed your first job, and you’re ready to spend that hard-earned money. However, when you get your check or view your pay statement, a few things might be a little confusing.

Read on to learn how to understand the ins and outs of what affects your take-home pay.

Pay Statement Terms

You may think your paycheck features a straightforward dollar amount that represents how many hours you’ve worked. What you’ll find, though, are several different sections and terms, such as gross earnings, taxes withheld, and net earnings. Here is a look at what those terms mean.

Gross Pay

Gross pay refers to the amount you earned before taxes, health insurance, retirement contributions, and other deductions are taken out. If you earn an hourly wage, your gross pay is determined by the number of hours you worked during a pay period. Typically, the pay stub will list how many hours you worked during the pay period, the hourly rate you earn, and the amount you earned when hours worked is multiplied by your rate.

If you get paid an annual salary, the pay statement will list the amount you earned during the current pay period.

Along with listing how much you earned in total during the most recent pay period, your pay statement will also include the total amount you’ve earned for the year. Your total earnings will be listed under “Year-to-Date” or “YTD.”

There might be times during the year when you earn more than usual, as a result of working overtime, earning a bonus, or getting a commission. If you have additional earnings, they will be included on the pay statement as well, usually under a heading that describes what they are, such as “bonus” or “overtime.”

Taxes Withheld

More likely than not, your gross earnings are going to be higher than the actual amount you got paid. One reason for this is because your employer needs to withhold certain taxes from your pay each period. While the types of taxes and exact amount of those taxes will vary based on where you live and work, you can generally expect your employer to withhold the following:


Depending on the benefits offered by your employer, you might make contributions to retirement, insurance premiums, or savings accounts from your pay. The amount might be automatically deducted from your pay, before taxes are taken out. Pre-tax deductions reduce your taxable income, helping you save more money.

Some of the more common types of deductions you might see on your pay statement include the following.

  • Health insurance premiums: Employer-sponsored health insurance plans are the most common type of health coverage in the U.S., protecting 56% of the U.S. population. Depending on the type of policy you have, you might need to pay some or all of the premium. It will be taken out from your pay before taxes are deducted. Along with medical coverage, some businesses also offer dental and vision coverage that you can pay for with funds from your paycheck.
  • Health savings account/flexible spending account (HSA/FSA) contributions: In addition to health insurance, some employers give employees the option of contributing to HSA or FSAs, allowing you to set aside pre-tax money for medical and health-related expenses. You can decide how much, if anything, you want deducted from each paycheck. There are limits to the amount you can contribute to either an HSA or FSA. The FSA limit is $2,750 per year (2020) per employee, while the HSA limit is $7,100 for a family plan or $3,550 per individual (2020). The money in an HSA can stay there indefinitely, but you need to use the money in an FSA by the end of the year.
  • Dependent Care FSA: You might also have the option of contributing to a dependent care FSA (DCFSA), which you can use to pay for daycare, babysitting expenses, or other childcare expenses with pre-tax income. The maximum amount you can contribute to a DCFSA in one year is $5,000 (2020) if you file as head-of-household or a joint return with your spouse.
  • Life insurance premiums: Many workplaces offer group life insurance, a plan where your employer owns the policy and pays all or some of the premiums. These plans usually do not require a medical exam, and the coverage typically amounts to one or two times your annual salary. Some employers also offer the option of buying supplemental coverage, which comes out of your paycheck and may require additional paperwork or medical exams.
  • Retirement plan contributions: If your employer offers a 401(k) or similar plan, you can decide to have a percentage of your income or a set dollar amount from each paycheck deposited into the account. In some cases, your employer may partially match these funds. If you’re a government employee or work for a nonprofit organization, you may have access to 403(b) or 457 plans.

Net Pay

After deductions are taken out of your gross pay and the appropriate taxes are withheld, the remaining amount is your net pay. Net pay is the total that gets deposited into your bank account. It is your money to spend as you see fit.

Terms to Know

Beyond pay and deductions, you may see other common terms or acronyms on your pay statement, such as the ones below.

  • YTD: This acronym stands for year-to-date and indicates the total amount you’ve earned or spent on various deductions during the year.
  • PTO: Meaning paid time off, this item shows how much time an employee has accrued to take days off and still get paid.
  • Reimbursements: This is a repayment made to employees who spent their money on work-related items, such as a uniform.
  • Imputed pay: This term refers to the value of non-cash compensation you may receive, such as a gym membership or personal use of a company car.

Maximizing Savings

If you get a big tax refund each year, you may have had too much withheld in taxes during the previous year, meaning you’re not making the best use of your paycheck. While you may think you’re playing it safe, you’re allowing the IRS to hold your money for a year or longer, interest free, instead of using, saving, or investing that money on your own.

To make sure you’re having the proper amount of taxes deducted, double-check your W-4 form and direct any questions you may have to a tax professional.

If you want to complete a new W-4, ask your payroll department for a new form or find one directly on the IRS website. Once completed, give it to your employer.

Regularly Review Your Pay Statement

Now that you have a better understanding of your pay statement, remember to always take a few moments to review it and report any errors to your human resources or payroll department. The sooner you catch a mistake, the quicker your company can fix it.

For easy access to your hard-earned cash, become a PSECU member and sign up for direct deposit.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.