We all look forward to seeing our pay stub, whether our net pay appears in our checking accounts with direct deposit or we receive physical checks. It’s easy for your eyes to immediately dart to the big bolded number on the bottom of the payslip to see what the take-home pay is
Why? Well, the rest of the pay stub is difficult to understand. From payroll taxes like the Federal Insurance Contributions Act (FICA) to state income taxes to the Federal Unemployment Tax Act (FUTA), it can be pretty confusing.
The federal government requires that all employers—whether a small business or a large employer—preserve detailed payroll records for their employees for at least three years, but it does not require employers to provide employees pay stubs. But many states have different requirements, so employers should still understand the components of a pay stub, as proof of income. Plus, with all the compliance details and moving pieces that need to be tracked, a company may decide to use a payroll service rather than handling payroll itself.
Regardless of how paychecks get into bank accounts, it’s also important for every employee to understand on payday where hard-earned cash is going.
Here is how you should read your pay stub, using the Gusto pay stub as an example:
Employee information
The first thing you’ll notice is that on the Gusto pay stub, you’ll have all the important employer and employee information. It also has the pay period so you know for what time period you’re receiving your earnings.
Employee earnings
This is the part of the pay stub that shows you your hourly pay rate and number of hours worked (if you are an hourly employee) or your salary. For salaried employees, your hours are defaulted to 40 hours per week. It also includes your overtime (if hourly), any bonuses, or commissions for this current pay period, along with what has been earned year to date (YTD).
It’s important to note that this is your gross earnings, which is what you would make before taxes, contributions, and deductions.
Employee taxes withheld
This section includes the taxes that are taken from your gross pay and will be included on your W-2 for tax filing purposes. They are sent to the government by your employer.
A withholding tax is a pay-as-you-go tax to the IRS. The government withholds three taxes from your pay.
The federal income tax can be calculated through the W-4 form and the IRS tax withholding calculator. These three things determine how much you withhold:
- Marital status
- The number of allowances claimed on the W-4
- Compensation (Note: This may depend on the State where your employee receives payroll.)
Employees who anticipate a full refund may be exempt from withholding. This is different from employees who are exempt, like clergy or certain visa holders.
Social Security tax and Medicare (i.e., FICA) are two other taxes withheld from every tax-paying worker. Social Security is calculated as 6.2% of your gross wages.
Medicare taxes differ depending on your income level. For individuals making up to $200,000, your Medicare taxes are 1.45% of your gross earnings; for those making more than $200,000, the taxes are 1.45% for the first $200,000 of your gross income and 2.35% for the remainder of your income that is more than $200,000.
As with all major taxes, Gusto’s payroll system calculates these on your behalf.
Employer taxes
This section includes the taxes that are taken from your employer and do not impact your net income.
The important thing to take away from this section is that these are the employer’s tax burden, not the employee. However, because the employer pays taxes on behalf of their employees, the fully-burdened cost of an employee is actually higher than the gross earnings.
In the United States, the employer is responsible for not only withholding your taxes, they are also required to pay an equivalent portion for Social Security and Medicare. You’ll notice that the amounts for Social Security and Medicare are the same.
The only difference between employee taxes withheld and employer taxes is that Medicare is always calculated on the “regular” Medicare tax rate: 1.45%.
The employer is also required to pay for the taxes for Federal Unemployment Tax Act (FUTA). For 2023, the FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. However, most employers may receive a credit of 5.4% when they file their Form 940, resulting in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%).
The last line is specific to Tennessee but most states and some cities levy their own tax to help cover the cost of unemployment claims your business receives.
As with other taxes, Gusto calculates these taxes on your behalf.
The important thing to take away from this section is that these are the employer’s tax burden, not the employee. However, because the employer pays taxes on behalf of their employees, the fully-burdened cost of an employee is actually higher than the gross earnings.
Employee deductions
This section includes deductions from an employee’s pay for retirement, healthcare (including premium payments or any contributions to a health savings account), or other benefits. Our sample pay stub doesn’t have any employee deductions.
Employer contributions
This section includes your employer’s contributions toward your retirement plan, health insurance premiums, or other possible employee benefits, such as group term life insurance.
Summary
This is the summary section of your paycheck stub. You’ll notice a few familiar line items and numbers:
- Gross Earnings: This is the same number we saw earlier in the pay stub. This is what you earned in this pay period before taxes and deductions.
- Pre-Tax Deductions/Contributions: Some deductions and contributions are pre-tax, which means they are taken out of your gross earnings before taxes. This is a good thing for the employee because it means your taxable earnings are actually lower, which means you’ll pay lower taxes.
- Taxes: This is your tax contribution for this pay period. Notice the number matches the sum of your withholding taxes. It does not include employer taxes.
- Post-Tax Deductions/Contributions: Other deductions and contributions are post-tax, which means they’re taken out of your post-tax pay.
- Reimbursements: If you received a reimbursement this pay period, it would be located here. It is not counted as part of your gross earnings and not taxed because you are being reimbursed for a payment you’ve made on your employer’s behalf.
- Check Amount: Your check amount is typically called your net earnings or take-home pay. This is the total amount of money you typically look for right away because that’s the earnings you will actually be paid this pay period after you net out all the taxes, contributions, etc. Congrats, you got paid!