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WalletPrep worksheet · Money basics

How to read your paycheck

Name ____________________ Date __________

Key ideas

  1. Budget from net pay, not gross pay. Net pay is what reaches your account. In the example, $2,000 gross becomes $1,537 take-home.
  2. FICA is 7.65% of your wages. That is 6.2% for Social Security plus 1.45% for Medicare. Your employer pays a matching 7.65% on top.
  3. Your W-4 sets your federal withholding. A form you give your employer. It sets the tax taken from each check. Too little means a bill in April.

Vocabulary

Gross income
Your total pay before any taxes or deductions are taken out. Salary offers and loan applications usually ask for this number.
Take-home pay
The money that actually lands in your bank account after taxes and payroll deductions come out of your paycheck.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Tax withholding
Income tax your employer takes out of each paycheck and sends to the IRS for you, as a prepayment of your yearly tax.
Form W-4
The form you give your employer to set how much federal income tax is withheld from each paycheck.
Flexible spending account
A workplace account that lets you set aside pre-tax pay for medical costs (or dependent care), usually lost if you don't spend it in the plan year.

Work it out

Dana earns $52,000 a year, paid every two weeks, so her gross pay is $2,000 per check. She puts 5% into a traditional 401(k).

  1. Gross pay
  2. 401(k), 5% pre-tax
  3. Social Security, 6.2%
  4. Medicare, 1.45%
  5. Federal income tax withheld
  6. State income tax withheld
  7. Net pay

Check yourself

  1. Your gross pay is $1,500. What is your Social Security tax at 6.2%?

    • A. $62
    • B. $93
    • C. $114.75
    • D. $150

  2. Which deduction lowers the pay that income tax is figured on?

    • A. A Roth 401(k) contribution
    • B. A traditional 401(k) contribution
    • C. A wage garnishment

  3. You got a large tax refund last year and want more in each paycheck. What should you change?

    • A. Your 401(k) percentage
    • B. Your bank account
    • C. Your health plan
    • D. Your W-4

Your turn

Open your latest pay stub and find five numbers: gross pay, federal withholding, Social Security, Medicare and net pay. Check that net pay matches your deposit, then run the IRS Tax Withholding Estimator.

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Answer key

How to read your paycheck

Work it out

  1. Gross pay$2,000
  2. 401(k), 5% pre-tax− $100
  3. Social Security, 6.2%− $124
  4. Medicare, 1.45%− $29
  5. Federal income tax withheld− $150
  6. State income tax withheld− $60
  7. Net pay= $1,537
  1. Her 401(k) takes 5% of $2,000 = $100 before income tax is figured.
  2. FICA is figured on the full $2,000, because 401(k) money still counts for it: $2,000 × 6.2% = $124 and $2,000 × 1.45% = $29.
  3. The $150 federal and $60 state withholding come from her W-4 and the tax tables. They are shown on her stub, not set by a fixed rate.
  4. $2,000 − $100 − $124 − $29 − $150 − $60 = $1,537. She budgets from $1,537, not $2,000.

Check yourself

  1. B. $93 $1,500 × 6.2% = $93. Medicare would be $1,500 × 1.45% = $21.75, for $114.75 of FICA in all.
  2. B. A traditional 401(k) contribution Traditional 401(k) contributions come out before income tax. Roth contributions and garnishments come out of pay that has already been taxed.
  3. D. Your W-4 Your W-4 tells your employer how much federal income tax to withhold. Withholding less now means a smaller refund later.