Understanding your paystub

When you earn your first paycheck, you might be surprised to see how your take-home pay is less than what you thought you'd earned. Gross earnings, net income, taxes, deductions - what do all these terms mean? This easy-to-read guide will help you make sense of your paycheck and understand where your money goes.

Gross earnings are what you're told you will earn before anything has been taken out. If you were told your salary would be $\mathrm{\$}\mathrm{60,000}$‍ your monthly gross pay should be $\mathrm{\$}\mathrm{5,000.}$‍ But, don't expect to see all that money in your bank account. Several deductions will be made from your gross earnings.

Legal or statutory deductions are things the government says have to be taken out of your paycheck. These include federal income tax (money that helps run the country), state income tax (money that helps run your state), Social Security ($6.2\mathrm{\%}$‍ of your earnings set aside for your future), and Medicare/Medicaid ($1.45\mathrm{\%}$‍ of your earnings to help cover healthcare costs). The Social Security and Medicare/Medicaid taxes combined make up the FICA tax, totaling $7.65\mathrm{\%}$‍ of your income.

You also have voluntary deductions, expenses you can choose to have automatically taken out of your paycheck. These are the benefits you chose in your hiring paperwork, or during the open enrollment. They might include insurance premiums (your share of the insurance cost), money set aside for retirement (like a 401(k) plan), charitable donations (money you give to causes you care about), and money saved up for healthcare or childcare costs.

Let's break this down with a real-life example:

So, if you earn $\mathrm{\$}\mathrm{3,000}$‍ every two weeks, after all the mandatory and optional deductions are subtracted, you will take home $\mathrm{\$}\mathrm{1,510.50}$‍. The $\mathrm{\$}\mathrm{1,510.50}$‍ is known as your net income or your take-home pay.

Let's say you've landed a new job earning $\mathrm{\$}20$‍ per hour and worked $80$‍ hours over two weeks. Your gross pay will be $\mathrm{\$}20$‍ per hour times $80$‍ hours, which equals $\mathrm{\$}\mathrm{1,600}$‍. This is your gross pay. But, you don't get to take all that $\mathrm{\$}\mathrm{1,600}$‍ home.

Let's say statutory deductions, like taxes and Social Security, add up to $\mathrm{\$}350$‍ and you also have voluntary deductions such as $\mathrm{\$}50$‍ for health insurance and $\mathrm{\$}100$‍ for a retirement account. Your net income (or take-home pay) is the gross pay ($\mathrm{\$}\mathrm{1,600}$‍) minus all deductions ($\mathrm{\$}350$‍ + $\mathrm{\$}50$‍ + $\mathrm{\$}100$‍): that leaves you with $\mathrm{\$}\mathrm{1,100}$‍. Your gross income was $\mathrm{\$}\mathrm{1,600}$‍, but your net income - the actual money deposited in your bank account- is $\mathrm{\$}\mathrm{1,100}$‍.