How to Understand Your Pay Stub

Do you remember the last time you received an actual physical check on payday? It was a thrill to receive that envelope at the end of the week, revealing the tangible reward for dedicating much of my time and talents. The pay stub featured dozens of valuable insights, but most of us simply glanced at the check amount and thought “yeah, that sounds about right.” As electronic pay stubs and direct deposit have replaced this old school approach of getting paid by physical check, many employees neglect to access and review their pay stubs at all – sometimes for months, even years! Shocking, I know.

I review employee pay stubs as part of the financial planning process, and I have discovered that each document tells a story. Upon review, I can tell you about an employee’s daily commute, numbers of hours worked, utilization of paid time off or overtime work, group insurance benefits, automated savings contributions, and total compensation. You may be surprised about how much personal information can be gathered by reviewing a household’s pay stubs and tax returns.

For this article, I examined over 40 real pay stubs across multiple industries to help guide you through an interpretation of your own story. Before we dig deep, open a new browser window to access a recent pay stub so you can follow along!

Start with the Basics

Employer’s company information: Simply verify this pay stub and corresponding paycheck are in fact yours!

Pay Period, Rate, and Frequency: Are you paid weekly (x52), bi-weekly (x26), semi-monthly (x24), or monthly (x12)? Your pay stub will feature a date range to determine your pay period, which will help you estimate this year’s income and tax liability. Also make note of your hourly pay rate.

Paid Time Off (PTO): Your leave balances may be included, reminding you how many hours of vacation, sick, accident, birthday, or holiday pay you have accrued or used year-to-date (YTD). Review your employee benefits handbook before assuming your ability to carry unused PTO to future years. I have personally left weeks of unused vacation on the table – not smart.

Earnings – Deductions – Taxes = Net Pay

Earnings / Gross Pay: Our favorite part of the pay stub – how much did we get paid?! This total (gross income) is subject to deductions and taxes moving ahead in our analysis. You may consistently receive a base salary (pay rate * number of hours = pay amount), and you may also receive additional pay from the following variable sources:

  • Overtime
  • Commission
  • Performance Bonus
  • Retention Bonus
  • Retro(active) Pay
  • PTO
  • Orientation
  • Training
  • Cell Phone
  • Fitness Center
  • Severance Pay
  • Expense Reimbursement
  • Transportation/Mileage
  • Taxable Fringe Benefits
  • Stock Compensation


After your gross pay is calculated, there are various employee-paid benefits to deduct.

Retirement Plans: You may contribute to mandatory or elective defined contribution retirement plans, such as a pre-tax 401(a), 401(k), 403(b), or 457(b). These contributions are excluded from taxable income, meaning they reduce your taxable income at your highest marginal tax rates and will not appear on your income tax return (Form 1040). Employer matching or non-elective plan contributions are also excluded from income. Although your contributions are not subject to income tax, they are still subject to payroll taxes (later discussed). Future distributions from these pre-tax retirement accounts will be included in taxable income, subject to ordinary income tax rates. On the other hand, Roth and after-tax plan contributions are subject to income tax in the current year but may allow tax-free distributions in retirement. Here is an article that outlines the advantages and disadvantages of both traditional and Roth contributions to help you make well-informed decisions in alignment with your personal objectives.

Medical / Dental / Vision Insurance: Your employer may offer what is called a Section 125 Cafeteria Plan, allowing employees to pay for various group benefits on a pre-tax basis. Like walking through a cafeteria line, you can pick and choose from a variety of pre-tax and after-tax benefit options (I always choose the orange Jell-O). This is an example of a ‘fringe benefit,’ which is a form of compensation other than customary employee wages. The employee and employer often share the costs of health care insurance premiums, as shown on your pay stub. You may also elect to cover your spouse and/or dependents on your health plan during your benefits enrollment period. Dental and vision coverages are usually inexpensive add-ons, but you may consider self-funding these risks based on personal variables. Recognize your employer’s health plan contributions as a major form of compensation.

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 payroll contributions are excluded from income taxes and payroll taxes, making the HSA an incredibly tax-efficient savings vehicle. Keep in mind that the annual contribution limits for individual and family HSAs include both the employee and employer contributions, and you cannot further deduct these payroll contributions on your tax return since they are already excluded from income. Discover how to use your HSA as the ultimate retirement account!

Flexible Spending Accounts (FSA): You may contribute to health care and/or dependent care FSAs, also exempt from income and payroll taxes. Unlike health savings accounts, FSA balances must usually be spent during the current year, not able to be carried over indefinitely for future expenses.

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 cost of benefit coverage in excess of $50,000 will be included in your taxable income. You may have also elected to pay for additional coverage for yourself, a spouse, or other dependents. Employee-paid coverage is paid after-tax, but the death benefit is received tax-free. Here is a reminder to verify your designated beneficiaries on your life insurance policies and retirement accounts!

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/hearing/speech). Accidental death covers exceptional circumstances, such as traffic accidents, homicide, drowning, and accidents involving heavy equipment. This coverage is viewed as a supplement to your life insurance policy. Like group term life insurance, you likely have an option to pay for additional AD&D coverage with after-tax dollars.

Disability Insurance: Short-term (STD) and long-term (LTD) coverage may be included in your employer or employee-paid benefits. This coverage provides benefits in the form of periodic payments if you are unable to work due to sickness or accidental injury. The specific costs and benefits of disability insurance will be outlined in your employee benefits handbook. Make note of the policies’ elimination periods, which are the required waiting periods before disability income payments begin. If these premiums are excluded from taxable income, the disability payments will be subject to ordinary income tax.

Transportation Benefits: You may exclude employer-provided qualified transportation fringe benefits from income, within limits. These include transit passes and qualified parking. Qualified bicycle commuting reimbursements are also currently excluded from gross income, but I have not seen those on a pay stub yet!

Income Taxes

Federal Income Tax (FIT) Withholding: Your gross earnings that were not deducted before tax as mentioned above will be included in your taxable income. Your wages that are subject to federal income tax will be reported in Box 1 of your Form W-2, and your withheld taxes will be reported in Box 2. Your pay stub will likely include your intended filing status (such as Single or Married Filing Jointly), number of tax allowances/exemptions, and any additional withholding you have manually elected. You can request a change to your federal income tax withholding by submitting a Form W-4 (Employee’s Withholding Certificate) to your employer. The IRS helps you estimate your federal tax withholding with this handy calculator. Also check to ensure your state tax withholding is accurate, if applicable. I urge you not to wait for your tax forms to arrive before looking at your withholding for the previous year. Use your pay stub as a checkpoint throughout the year and adjust accordingly – something about ‘measuring twice.’

FICA Payroll Taxes

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

Social Security (SS) Tax: Also seen as Old Age, Survivors, and Disability Insurance (OASDI) Tax, your gross earnings up to the annual wage base ($142,800 in year 2021) are subject to a 12.4% Social Security tax. You pay 6.2% as the employee and your employer pays the other half.

Medicare Tax: Your gross earnings are subject to a 2.9% Medicare tax. Like the Social Security tax, the employee and employer each pay half (1.45%). If your gross earnings exceed $200,000 (regardless of marital status), a 0.9% Additional Medicare Tax will be withheld on earnings above that threshold. Earnings are subject to the 0.9% Additional Medicare Tax if above $200,000 for single filers or $250,000 for joint filers, and you may receive a refund if you overpay.

Social Security (6.2%) + Medicare (1.45%) = 7.65% Employee Contribution

Note: Government legislation is subject to change, and these figures may no longer be accurate when you read this.

Net Pay

After subtracting your employee deductions and taxes from your gross earnings, your pay stub will show your net pay. This is the amount that is either paid to you by physical check or direct deposit to a checking or savings account. You may also split and direct your net pay to multiple financial institutions. This is a convenient way to automate earmarked savings for an emergency fund or other objectives. I also like the idea of using this feature to save for annual homeowners insurance and property tax payments if you choose not to use a mortgage escrow account. Simply provide an account number, routing number, and deposit amount to your payroll department. Give every dollar a job!

I hope this outline provided some useful insights as you reviewed your pay stub. You may realize that many of the deductions from your gross income are surprisingly in your control. When creating a budget, I prefer to use gross pay as the top line, as to not ignore these deductions and taxes as meaningful expenses. If you have specific questions about your pay stub or any employee benefits, do not hesitate to request a copy of the benefits handbook from your payroll department. Also ask for the summary plan description (SPD) for information about your employer-sponsored retirement plan(s). Understanding your financial documents will provide the clarity and confidence necessary to make well-informed decisions on your path to financial independence!

Add a comment

Recommended Articles


Go beyond the basics, receiving new articles, videos, and planning tools as they are released.