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Paystubs and Taxes
Vocabulary
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Paystub – a piece of paper that is given to an employee with each paycheck. A paystub shows the detail of how the pay has been calculated.
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Gross Pay – the amount of total pay that an employee earns during the period, before any deductions are taken out.
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Deductions – amounts that are withheld by an employer for various expenses. Examples are taxes, health insurance, retirement, etc.
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Net Pay – the amount an employee actually receives in a check or through direct deposit, after all deductions have been taken out.
Paystubs
John Dough has gotten his first job and has received his first paycheck. Let's take a look at the paystub, which contains all the information about the pay period.
Parts of a Paystub
Paystubs below show the location of the employee's name, ID, pay date, pay rate, pay period, and the hourly rate.
| Allowances | ||
|---|---|---|
| ABC Mart | John A. Dough | Federal 1 |
| SSN | 123-45-6789 | State 1 |
| Employee ID | 98765 | |
| Hourly rate $10.25 | ||
| Pay Period | 1/1/19 to 1/15/19 | |
| Pay Date | 1/16/2019 |
| Hours Worked this Pay Period |
|---|
| Regular 37 |
| Overtime 0 |
| Holiday 0 |
| Earnings | ||
|---|---|---|
| This Period | YTD | |
| Regular Pay | $379.25 | $379.25 |
| Overtime Pay | $0.00 | $0.00 |
| Holiday Pay | $0.00 | $0.00 |
| Total Pay | $379.25 | $379.25 |
Paystubs below show the location of the gross pay, total deductions, and net pay.
| Deductions | ||
|---|---|---|
| This Period | YTD | |
| Federal Income Tax | $14.05 | $14.05 |
| Social Security Tax (FICA) | $23.51 | $23.51 |
| Medicare Tax (FICA) | $5.50 | $5.50 |
| State Income Tax | 6.79 | 6.79 |
| Medical Insurance | $0.00 | $0.00 |
| Retirement [401(k)] | $0.00 | $0.00 |
| Total Deductions | $49.85 | $49.85 |
| Net Pay | ||
| Gross Pay | $379.25 | $379.25 |
| Total Deductions | $49.85 | $49.85 |
| Net Pay | $329.40 | $329.40 |
Reading a Paystub
John's paystub gives us information about his employment at ABC Mart. We can also use his paystub to figure out how much John worked and how much money John earned this pay period.
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What is John's hourly rate?
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How many hours did John work this period?
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How much was John's total pay this period?
The bottom of John's paystub shows all of the deductions withheld from his gross pay. The total deductions are subtracted from gross pay to calculate net pay. The net pay is the amount that he will actually receive in a check or through direct deposit.
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What are the total deductions this period?
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What is John’s net pay this period?
Taxes
The most common deduction from gross pay is taxes.
Taxes are government fees on income, property, or products. Almost all of us are required to pay taxes. Tax revenue collected is used to provide services such as public education and roads to citizens.
Income Taxes
Income taxes are assessed charged at the federal level and the state level.
However, not all states have income tax.
Americans began paying income tax in 1863 but it was not until 1943 that we started paying tax as we earn each paycheck. This is referred to as having the tax withheld.
Your employer withholds the tax from your pay, then pays the tax to the government on your behalf.
W-4
Employers are required to withhold tax from an employee’s earnings and pay the tax to the government on the employee’s behalf.
How do the employer's know how much to withhold?
Employees must fill out a W-4. A W-4 helps them to determine how much tax should be withheld from each paycheck.
Filing Income Taxes
In April, Americans file federal income tax with the Internal Revenue Service (IRS). When you file in April, you are filing a tax return for the previous year.
Form 1040 is used to calculate your tax for the year. The amount that has been withheld in your paycheck is only an estimate.
If your employer withheld more money than your calculated tax, you will get a refund for the difference. If the employer did not withhold enough, you will have to pay more tax before the filing deadline, usually April 15th.
FICA
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Another type of tax is FICA (Federal Insurance Contributions Act). Social Security Tax (FICA) $23.51 and
Deductions This Period YTD Social Security Tax (FICA) $23.51 $23.51 Medicare Tax (FICA) $5.50 $5.50 -
This tax is used to fund Social Security and Medicare. Medicare is a federal program that provides hospital care to the elderly or disabled.
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1.45% of an employee’s income is withheld to pay for Medicare tax.
Social Security
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Social Security provides income or benefits to the elderly and disabled. It also provides benefits to children of deceased employees.
Deductions This Period YTD Social Security Tax (FICA) $23.51 $23.51 -
The Social Security tax rate is 6.2% of your gross income. However, you do not have to continue paying it after you reach a certain income.
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Your employer must match your contribution to Social Security and Medicare.
Taxable Income
The amount of taxes you will owe is based on your taxable income. So of course, your deductions or the amount you have withheld is based on your taxable income.
The greater your earnings, the greater your deductions will be because when you make more money, you have to pay more in tax.
Cafeteria Plan
Cafeteria plans are legal ways to shelter part of your income. The amount that you put in a cafeteria plan will not be counted as taxable income, so it will reduce your tax.
When you choose to use a cafeteria plan, you prepay certain expenses. Some examples are:
- Medical expenses
- Day care
- Retirement savings
The money you prepay can’t be used for any other expenses.
Benefits
Other than your salary, your employer may offer other benefits to you. These benefits should be considered when you are offered a new job. Benefits can cost an employer up to 50% of your salary. Benefits that can be part of an employment package are:
- Health, Dental, and Eye Care Insurance
- Life Insurance
- Disability Insurance
- Flexible Spending Account
- Retirement Plan
- Paid Vacation
- Paid Holidays
- Parental or Maternity Leave
- Employee Discounts
- Employee fitness programs
- Tuition Reimbursement
- Stock Purchase Plans