Most paychecks come with a pay stub. It's a detailed record of your total earnings (for the pay period that just ended and the year to date), payroll withholdings and deductions from those earnings, and what those withholdings and deductions were for. Understanding your pay stub and knowing where your money is going are essential to effective money management.
What follows is an overview of the types of information that commonly appear on a pay stub. Keep in mind that pay stubs will vary from employer to employer. If you have specific questions about information appearing on your own pay stub, please contact your payroll department.
Your gross pay: Includes your taxable earnings before any payroll withholdings or deductions like those described below are taken out. Your pay stub will also show your net pay—what's left after all payroll withholdings and deductions are removed.
Federal, state and local income taxes: The amount of any federal income tax withheld from your earnings is shown on your pay stub along with any state or local income taxes withheld.
Checking your federal income tax withholding: It’s important to check your federal income tax withholding at least once a year and adjust it as necessary. Sometimes changes in your personal and professional circumstances can cause the rate at which tax is being withheld from your earnings to become outdated. You can adjust your withholding by completing and submitting a new federal form W-4.
Deciding how many allowances to claim: You're entitled to a certain number of withholding allowances, based on your projected itemized deductions, number of dependents, certain credits, and adjustments to income for the current tax year, as well as whether you have a working spouse or more than one job. The W-4 form includes a worksheet to help you determine how many allowances you're entitled to. You're permitted to claim fewer allowances than you're entitled to, but this may result in overwithholding, which is money that instead could be used to fund your retirement accounts.
Life events that may affect your withholding: If any of the following circumstances apply to you, you should review your withholding without delay:
Getting a new W-4 form: Your human resources department can provide you with a new W-4 form.
Social Security and Medicare taxes: FICA and OASDI both refer to Social Security tax. Your employer normally withholds Social Security tax at the rate of 6.2% of your earnings up to an annual earnings limit. This is your own contribution toward the cost of Social Security, and your employer matches your contribution out of its own funds. An entry for Medicare on your pay stub refers to Medicare tax. Medicare is health insurance for people age 65 or older, or under age 65 with certain disabilities. You and your employer are each subject to Medicare tax at the rate of 1.45% of all your earnings.
Employee benefit plans: You will typically see payroll deductions for medical, dental, or life insurance and any other benefits or forms of protective coverage you've enrolled in at work. Your pay stub also shows whether your premiums for such coverage were deducted before or after taxes were taken out of your earnings. Pre-tax deductions reduce your current taxable earnings. The reduction in your taxable earnings, in turn, reduces the amount of tax you pay.
Your pay stub will also show any contributions you made to your 403(b), 401(k), 457 or other retirement savings plan at work, as well as to any flexible spending accounts you're using to pay for health or dependent care expenses.
Union dues: If you belong to a union, any union dues taken out of your earnings are reflected on your pay stub.
Net Investment Income: Beginning in 2013, certain investment income will be subject to an additional 3.8% surtax, as enacted by the Health Care and Education Reconciliation Act of 2010.
For an individual, the 3.8% surtax is imposed on the lesser of:
The threshold amount for 2013 is $200,000 for single filers and $250,000 for married joint filers ($125,000 for married filing separately).
For Trusts and Estates, the 3.8% surtax is imposed on the lesser of:
*Net investment income includes, but is not limited to, the following three categories:
1. Interest, dividends, annuities, royalties and rents;
2. Income from a business in which the taxpayer does not personally, materially participate, and business income from a trade or business of trading in financial instruments or commodities; or
3. Capital gains and other net gains from the sale of property.
It is important to note that there is an exception for retirement plan distributions that states distributions from the following are not NII:
1. Qualified pension, profit-sharing, and stock bonus plans;
2. Qualified annuity plans;
3. Annuities for employees of tax-exempt organizations or public schools;
5. Roth IRAs; or
6. Deferred compensation plans of state and local governments and tax-exempt organizations
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. TIAA-CREF or its affiliates do not provide tax or legal advice. Taxpayers should seek advice based on their own particular circumstances from an independent tax or legal advisor.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.
TIAA-CREF provides retirement plans at more than 15,000 nonprofit institutions.