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