How to read your paycheck

Your gross pay is what you earn before anything comes out. Your net pay, or take-home pay, is what lands in your bank account after taxes and deductions, and it is the number to budget from.

Gross pay comes first

Gross pay is your salary or hourly wages for the pay period, before anything is taken out. Everything else on the stub is subtracted from this number.

FICA is a flat 7.65%

Social Security takes 6.2% and Medicare takes 1.45% of your wages, for 7.65% in all. Social Security stops at a yearly wage cap set by the Social Security Administration. Medicare has no cap.

Income tax withholding is an estimate

Federal and most state income tax is withheld from each check based on your W-4 and your pay. It is a prepayment. You settle the real bill when you file your return.

Pre-tax deductions lower your taxable pay

Traditional 401(k) contributions and most employer health premiums come out before income tax. That shrinks the pay that income tax is figured on.

Gross pay versus net pay

Your pay stub starts with gross pay. For a salaried job, it is your yearly salary divided by the number of pay periods. For hourly work, it is your hours times your rate, plus any overtime.

Net pay is what is left after every tax and deduction. It is the only number you can spend. When you build a budget or size a rent payment, start from net pay. A $52,000 salary does not mean $52,000 to spend.

The tax lines on your stub

Federal income tax withholding is usually the largest tax line. Your employer figures it from your W-4 and IRS tables, so two people with the same pay can see different amounts.

State income tax works the same way in most states. A few states have no income tax on wages, and some cities or counties add their own local tax. Your stub will show any that apply to you.

Social Security and Medicare are often labeled FICA, OASDI or Med. They are a flat percentage of your wages, not an estimate. Social Security is 6.2% and Medicare is 1.45%. Your employer pays the same amount again, which does not show in your pay. Very high earners pay an extra 0.9% Medicare tax, and the IRS explains the rules.

Pre-tax and after-tax deductions

Pre-tax deductions come out before income tax is figured. The common ones are traditional 401(k) or 403(b) contributions, health, dental and vision premiums, and health savings account (HSA) or flexible spending account (FSA) contributions.

One detail surprises people. Traditional 401(k) money skips income tax now, but it still counts for Social Security and Medicare. Health premiums paid through your employer's plan usually skip both.

After-tax deductions come out of pay that has already been taxed. Roth 401(k) contributions, some life or disability insurance and wage garnishments go here.

How the W-4 sets your withholding

Form W-4 tells your employer how much federal income tax to hold back. You fill it out when you start a job and can change it any time. It asks about your filing status, other jobs in the house, dependents and other income or deductions.

If too little is withheld, you owe money when you file, and you may owe a penalty. If too much is withheld, you get a refund, which means you lent the government money with no interest. The IRS Tax Withholding Estimator helps you aim close to the middle. Tax brackets and amounts change each year, so use the current IRS tools instead of last year's numbers.

The year-to-date column

Most stubs show each line twice: this period and year to date (YTD). The YTD column adds up every check so far this year. Use it to see how much you have put into your 401(k), and to check your W-2 in January. The totals on your last stub of the year should match it closely.