The amount of money deposited in your bank account on payday is less than your salary or wages as a result of payroll deductions. In addition to taxes the law requires your employer to withhold from your paycheck, you may have optional deductions related to programs or benefits in which you enrolled or legal garnishments as a result of financial obligations. Some deductions reduce your taxable income; others have no affect on the taxes you pay. Understanding where your money goes and the deductions on your pay stub or statement is part of managing your finances. If you question an entry, ask your human resources department to confirm its accuracy.
Taxes comprise the bulk of paycheck deductions. Your federal tax deduction is based on your earnings and the filing status and number of allowances you entered on the Form W-4 Employee's Withholding Allowance Certificate you gave your employer. You also pay a percentage of your earnings toward two retirement-related taxes mandated by the Federal Insurance Contributions Act: Social Security and Medicare. If you live in a state that taxes income, a deduction for state tax is required. Regardless of your state's tax requirements, municipalities where you live and work may impose wage and local services taxes that you pay through payroll deductions.
Deductions Before Taxes
You may have paycheck deductions if you save for your child's college costs or for your retirement through a program offered by your employer. Contributions to your profession's pension plan, a savings plan such as a 401(k), or a deferred compensation plan appear as line items on your pay statement. Your employer subtracts the total of these deductions from your gross income before calculating how much to withhold for income taxes. Child or dependent care, health benefit premiums and eligible commuter program deductions you elect reduce all mandated taxes, including Medicare and Social Security.
Your employer may give you the opportunity to make charitable contributions and purchase insurance policies, savings bonds and recreational memberships through post-tax deductions. If your job is covered by a collective bargaining agreement, your pay statement has either a deduction for union dues or fair share contribution. These deductions, as well as any garnishments imposed to collect debts, child support or alimony by a government agency or court order, reduce your take-home pay, but not the amount withheld for local, state and federal taxes. Your employer subtracts them from your earnings after deducting retirement and tax payments and before your voluntary deductions.
Monitor your pay statements throughout the year so that any errors can be corrected immediately and you don't lose money. For example, any time you adjust your W-4 withholding, receive a raise or work additional hours, verify your pay reflects the change. Also, make sure your employer withholds taxes for the correct residence tax authority after you change addresses to avoid overpaying or underpaying local tax.
The information reported to the Internal Revenue Service on your W-2 corresponds to your final pay statement of the year. However, the taxable income shown on the W-2 differs from your gross earnings -- how much you made in total -- due to any pretax deductions you had. If you receive a 1099 form instead of a W-2 because you had income other than a salary, tips or wages, compare the earnings and taxes reported against your invoices, investment statements or receipts.
- University of Minnesota Office of Human Resources: Before-Tax and After-Tax Deductions
- Clearpoint Credit Counseling Solutions: How to Read Your Paycheck Stub
- University of Hawaii Disbursing and Payroll Office: Payroll Deductions
- State of Alaska Department of Administration: How to Read Your Payroll Stub and Yearly W2 Earnings Statement
- Debt.org: What Are 1099s?
- MyMoney.gov: Earn