How to Review a Pay Statement

Do you remember the last time you received a physical check on payday? It was a thrill (or a relief) to open that envelope at the end of the week, revealing the tangible return for your dedicated time and talents. The attached pay stub featured dozens of variables, but most of us simply tossed it aside to focus instead on the check itself. Since electronic pay statements and direct deposits have replaced these old school physical checks, many employees neglect to access and review pay statements at all, often for years at a time!

The review of pay statements can tell a unique story about your family. You can determine how much vacation or overtime is utilized, which automated savings strategies are in place, and if your household is on track to satisfy income tax liabilities. For this article, I examined over 40 real pay statements across multiple industries to help guide you through an interpretation of your own story. I encourage you to access your recent pay statement or simply follow our shared template.

Start with the Basics

Employee & Employer Information: Simply verify the pay statement and corresponding paycheck as yours! Did you know you have an employee ID?

Pay Frequency: The begin and end dates reveal the pay period, such as weekly (52 periods per year), bi-weekly (26), semi-monthly (24), or monthly (12). Knowing this frequency will help you determine the remaining pay periods and calculate estimated annual totals.

Paid Time Off (PTO): Your leave/absence balances show how many hours of vacation, sick, accident, birthday, or holiday pay have accrued and been used year-to-date (YTD).

Earnings & Gross Pay

This is our favorite part of the pay statement as an employee! These income sources are totaled before being subject to deductions and taxes. You may receive a consistent base salary (number of hours worked * pay rate = pay amount) plus additional compensation from the following variable sources:

Performance Bonus

Retention Bonus

Stock Compensation





Paid Time Off (PTO)

Severance Pay

Retro(active) Pay

Taxable Fringe Benefits

Expense Reimbursements


Cell Phone

Fitness Center


After your gross pay is calculated, various employee-paid benefits are deducted. Some of these deductions are pre-tax, meaning they are excluded from your taxable income on Form W-2 and cannot be further deducted on your tax return. No double-dipping! Post-tax (also called after-tax) deductions reduce your net pay but are still subject to taxation.

Retirement Plans: You may contribute to mandatory or elective (voluntary) defined contribution retirement plans, such as a pre-tax (traditional) 401(a), 401(k), 403(b), or 457(b). These contributions are excluded from taxable income, meaning they reduce taxable income at your highest marginal tax rate. Matching and non-elective employer contributions to these accounts are also excluded from income. Although your employee contributions are not subject to income tax, they are still subject to payroll taxes (discussed in a moment). Future distributions from traditional retirement accounts will be included in taxable income, subject to ordinary income tax rates. On the other hand, Roth and other after-tax plan contributions are subject to income tax in the current year but may be distributed tax-free in retirement. Before deciding between traditional and Roth contributions, understand the advantages and disadvantages of both options to make well-informed decisions aligned with your personal objectives.

Medical / Dental / Vision Insurance: Your employer may offer a Section 125 Cafeteria Plan, allowing employees to receive and pay for certain group benefits on a pre-tax basis. Like walking through a cafeteria line, you can pick and choose from various benefit options. You may elect to cover your spouse and/or dependents on your health plans, and dental and vision plans may be included or voluntary add-ons. These premiums are excluded from income and employment taxes.

Your employer may share health care insurance costs, with these combined annual premiums often exceeding $10,000. We should recognize these employer contributions as significant forms of compensation, especially when considering job offers or retirement health coverage. The total cost of employer-sponsored health coverage is shown on your Form W-2, Box 12, with Code DD. Before terminating employment, multiply this amount by 1.02 (102%) to estimate your anticipated annual COBRA cost.

Health Savings Account (HSA): If you are enrolled in an HSA-eligible high-deductible health plan (HDHP), you and your employer can make pre-tax contributions to your HSA. These contributions, specifically through payroll, are excluded from income taxes and employment taxes, making the HSA an incredibly tax-favorable savings vehicle. Be mindful that annual contribution limits for individual and family HSAs include both the employee and employer contributions; you cannot further deduct them on your tax return. Discover how to use your HSA as a valuable retirement and long-term care vehicle!

Flexible Spending Account (FSA): You may contribute to pre-tax health care, limited-use, or dependent care FSAs, also exempt from employment taxes. One benefit of FSAs is the ability to have immediate access to your elected annual amount, even when contributing throughout the year. Unlike health savings accounts, flexible spending accounts cannot be indefinitely carried over to future years.

Group Term Life (GTL) Insurance: Your employer may pay for a life insurance death benefit of $50,000 or up to a multiple of your base salary. The employer-paid cost of benefit coverage above $50,000 is included in your taxable income even though you don’t receive the funds. This is called imputed income, noted on our statement as Group Term Life – Taxable. Additional employee-paid coverage is an after-tax deduction, but the death benefit is received tax-free.

Accidental Death & Dismemberment (AD&D) Insurance: As described in its name, this insurance covers your unintentional death and loss of body parts or their functions (sight/hearings/speech). Accidental death includes exceptional circumstances, such as traffic accidents, homicide, drowning, and accidents involving heavy equipment. This coverage is supplementary to your life insurance policy.

Disability Insurance: Short-term (STD) and long-term (LTD) coverage may be employer-paid or offered as voluntary employee-paid benefits. Disability insurance provides benefits in the form of periodic payments if you cannot work due to sickness or accidental injury, usually limited to 60% of earnings up to a monthly maximum. Notice on our statement that long-term disability benefits are employer-paid but taxable as imputed income to the employee, ensuring future disability income will be received tax-free.

Transportation Benefits: You may exclude employer-provided qualified transportation benefits from income within limits. These include transit passes, qualified parking, and even qualified bicycle commuting reimbursements!

Income Taxes

Federal Income Tax (FIT) Withholding: Gross earnings not deducted pre-tax are included in your taxable income. Wages subject to federal income tax are reported in Box 1 of your Form W-2, and withheld taxes are shown in Box 2. Your pay statement will likely include your intended tax filing status, number of tax allowances/exemptions, and additional withholding requests. You can request changes to your federal income tax withholding by submitting a Form W-4 (Employee’s Withholding Certificate) to your employer. The IRS offers an online calculator to help you estimate your withholding elections. Also, review your state and local tax withholding if applicable.

FICA Employment Taxes

FICA stands for Federal Insurance Contributions Act, and these mandatory employment taxes provide benefits for retirees, the disabled, and children.

Social Security (SS) Tax: Also noted as Old Age, Survivors, and Disability Insurance (OASDI), your gross earnings up to the annual wage base ($147,000 in 2022) are subject to a 12.4% Social Security tax. You pay 6.2% as the employee, and your employer pays the other half. Our pay statement template shows how Social Security tax was limited to the 2021 wage base ($142,800 * 6.2% = $8,853.60). Your Social Security wages and taxes will be shown on your Form W-2 in boxes 3 and 4.

Medicare Tax: Your gross earnings are subject to a 2.9% Medicare tax. The employee and employer again split the tax (1.45% * 2). If your gross earnings exceed $200,000 (single) or $250,000 (married), a 0.9% Additional Medicare Tax is imposed on earnings above the threshold. Your Medicare wages and taxes will be shown on your Form W-2, boxes 5 and 6.

The formula to determine Medicare tax on our shared pay statement is:

Total Earnings ($8,922.50) + Imputed Income ($15.42) – Cafeteria Plan Benefits (Medical + Dental + Vision + HCSA + HSA = $678.26) = Medicare Taxable Wages ($8,259.66)

Medicare Taxable Wages ($8,259.66) * Medicare Tax (1.45%) = Medicare Tax Owed ($119.77)

Social Security (6.2% up to the wage base) + Medicare (1.45%) = Employee Contribution (7.65%)

State Disability Insurance

Our statement also includes California State Disability Insurance, a state-specific program that provides Short-Term Disability Insurance (DI) and Paid Family Leave (PFL) wage replacement benefits to eligible workers who need time off work. Five states (California, Hawaii, New Jersey, New York, and Rhode Island) require employee contributions to these programs. The SDI withholding rate in California for 2021 was 1.2% up to a wage limit of $128,298 = $1,539.58, as reflected on our pay statement.

Net Pay

After employee deductions and taxes are withheld from your gross earnings, you will receive the net pay amount by physical check or direct deposit. Consider automating earmarked savings by directing portions of your net pay to multiple financial institutions. Simply provide an account number, routing number, and deposit amount to your payroll department – giving every dollar a job!

How to Measure Twice & Keep Finance Personal

You may be surprised by how many expenses are deducted before net pay arrives in your bank account. When creating a budget or determining a savings rate, I prefer to include payroll deductions as expenses and gross earnings as the denominator. Many of these deductions are within your control as an employee.

To fully understand your pay statement and benefit options, request a copy of your employee benefits handbook. Learn more about your disability insurance details, including the elimination period (time-equivalent deductible) and specific definition of disability. Also, ask for a summary plan description (SPD) to review the details of your employer-sponsored retirement plan(s). Verify the designated beneficiaries on your group life insurance policies and employer-sponsored retirement accounts to align with your estate plan.

If you want to understand your annual compensation, deductions, and taxes for the previous year, review your annual Form W-2. The various employer and employee deductions are reported in Box 12 with unique lettered codes. Isn’t this fun?!

If you pay for home-related insurance and property tax payments without using an escrow account, consider directing a portion of your net pay to an earmarked savings account. Divide your estimated annual payments by the number of pay periods per year. You can also automate other savings objectives, such as emergency funds, down payments, holiday funds, and future travel expenses.

Discuss your remaining vacation pay with your family. Will taking more time off improve personal wellness in multiple areas of your life? Will your unused PTO carry to future years?

Review your pay statement as a checkpoint throughout the year and make adjustments to your elective deductions and tax withholding as needed. Multiply your pay period amounts by the number of remaining pay periods, then add your YTD amount to determine your estimated year-end numbers. Do not wait until the end of December to make last-minute adjustments!

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