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What is a Paystub? A Beginner’s Guide

Whether you’ve been working for 20 years or you just started your first job, pay stubs are something you should familiarize yourself with. They are so much more than a slip of paper that comes with your check.

So what is a paystub and why is it important?

It’s a breakdown of literally anything you need or want to know regarding your pay and how your net pay was determined.

It’s a lot to take in, but it’s easy once you break it down. Keep reading for an easy-to-follow beginner’s guide to understanding your paystub!

Your Gross Pay

What you are paid per period, before takes, is called your gross pay. This is not what you collect. From your gross pay amount, taxes are determined and deducted and the process begins. Now we continue to the first step.

Tax and Insurance Deductions

As previously mentioned, from your gross pay figure, deductions are taken out. This includes multiple taxes and may include health insurance if you have coverage through your employer.

Your stub includes a complete breakdown of tax deductions:

Federal Income Tax

Federal income tax is something you determine, to an extent. Your employer will use three important pieces of information to create the proper deduction:

  1. the information you provided on your W-4 (filing married or single, dependents, income adjustments)
  2. the amount of your taxable income
  3. how frequently you are paid

State Income Tax

Don’t be alarmed if you don’t see local income tax being taken out. Not all states have an income tax. 

If your state collects income tax, your employer will use the information provided on the state version of Form W-4 and your income to determine how much to withhold.

Local Income Tax

Local taxes are a little more tricky. Again, if your specific state does have an income tax, your employer will withhold them. However, the rate depends on your location.

If you don’t know the specifics of the income tax in the area in which you work, it is best to look into to avoid unwanted expenses when taxes are due.

Medicare and Social Security

Your employer withholds 1.45% of your gross annual income per pay period. Likewise, your employer pays 1.45% as well. Medicare taxes are withheld to benefit those currently receiving medicare health benefits. 

Your employer withholds 6.2% of your gross income for Social Security, up to an annual income cap of $137,700 for 2020. Just as with medicare taxes, your employer pays 6.2% for social security as well.

If you meet the criteria, you will collect social security when you retire. Also you can show your medical expenses when you file tax. Check out more about it here: https://taxfyle.com/blog/can-i-deduct-my-medical-expenses/.

Health Insurance

You may or may not have health insurance deductions. If you have elected to use the insurance your company provides and they do not cover 100 percent, you will see a deduction for the amount that you agreed upon.

Your Net Earnings 

Remember the first figure we looked at, your gross pay? Each of those deductions is taken from that figure. The result of that deduction provides your net earnings. Your net earnings are what you collect after taxes.

Another section you will most likely see is your year-to-date earnings. To put it simply, it is what you have earned since beginning employment with your current company.

How to Make A Paystub

If your employer does not provide you a paystub, or you’re now freaking out because you know it’s important to find the ones you have, don’t worry!

A paystub generator is your new best friend. It is exactly what it sounds like. You input your information and the system generates your paycheck stubs.

Once you generate them, you can reference them to ensure that deductions are being taken out correctly.

What Is A Paystub?

So, what is a paystub?

Now you have an understanding of what makes up your paystub, you can answer that question with why they are so important, and where you can generate them! Now that wasn’t hard, was it? You’re a pro!

Remember: no matter the topic, if you have a question, our blog probably has your answer!

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