Breaking Down Your Paycheck: What is on a Pay Stub?

October 4, 2018

Learn how to read a pay stub, types of deductions, and what it all means for your bottom line! Read on to fully understand your gross to net pay breakdown!

How to read a pay stub cover image

How to Read a Pay Stub

Let’s be honest.  The best day of the week is payday.  Sure, Fridays signal the end of a long workweek, and Saturdays can be leisurely and relaxing, but whatever day we get that paycheck in hand or see the direct deposit land in the bank—that is the best day of the week.

If we are still being honest, most of us do not know everything about our paycheck from gross to net.  In fact, some of us might not even notice our gross income. The most important figure to us is the bottom line—how much money we actually take home.

Plus, that pay stub is confusing and stressful to look at!  So, what if you found out that understanding your pay stub could help you avoid losing money?  Furthermore, you might actually keep more of your own money!  To help make that happen, you will need to know how to read a pay stub.

Gross and net

You have heard people say “gross to net” plenty of times over the course of your employment.  You’ve never cared to ask what exactly that means. Perhaps you’re just too embarrassed to admit that you don’t know (cue regrets about skipping Accounting 101 while you were in college).

Breaking Down Your Paystub image 3

Well, this is your lucky day!  Your gross amount is your salary divided by the number of pay periods.  If you’re an hourly employee, the gross is made up of your hourly wage multiplied by your number of hours in a pay period.

The gross amount is essentially the total amount of wages before any deductions.  Remember that your gross can also include accrual wages (vacation, sick, holiday, personal, bereavement time, etc.). Be sure to recognize the items which make up your gross amount each pay period.  Got it?  Good.

Now, your net pay is your gross amount minus any deductions.  If you are a contract worker, you probably do not have any deductions from your paycheck. So your pay stub would have the same amount for gross and net.

If you are an employee in any capacity, however, you should see at minimum several lines of tax deductions, depending on the state you live in.  If you enroll in any kind of benefits programs, then you will see deductions in addition to your tax withholdings.

Deduction details

Breaking Down Your Paystub image 2

Now that you know to expect tax withholdings and other deductions on your paycheck, let’s dive a little deeper.  Starting with tax withholdings, as mentioned before, you can expect to see FIT (Federal Income Tax), FICA (Medicare and Social Security), and possibly SIT (State Income Tax) withholdings.

The FIT withholding is based on how you completed your W-4 form when you were hired, and this will take into account your salary, tax bracket, and exemptions.  The FICA withholding is based on your salary multiplied by .0756 (or 7.65% of your salary, which includes 6.2% for Social Security, and 1.45% for Medicare).

As far as SIT is concerned, some states do not withhold State Income Tax (typically the tax burden is offset by a higher sales tax). Again, each state is different in how they calculate the SIT withholding.

Once we get past all the money Uncle Sam takes out of our checks, we can move on to the fun deductions:  fringe benefits.  These are the deductions we will see for items we actually consider to be an investment, or at least a payment made for services rendered:  health insurance, retirement plans, and child care.

Related:  On the Hunt: Identifying Payroll Resources

Post and Pre Tax Deductions

Now, this is where things can get a little tricky! These deductions will be calculated either before taxes are withheld, or after taxes are withheld.

Deductions taken before taxes are withheld are called pre-tax deductions. They lower your taxable income so Uncle Sam can’t take as much money from your paycheck.  Common pre-tax deductions include health insurance premiums, dental insurance premiums, Flexible Spending Accounts, Dependent Care Accounts, Health Savings Accounts, and 401k retirement plans.

Common post-tax deductions (also called after-tax deductions) include life insurance premiums, Roth IRA/401k contributions, and charitable contributions.

The last deduction to be mentioned is also the most dreaded:  the garnishment.  A garnishment is a court-mandated deduction from your paycheck for payment to another party.  Common garnishments include child support, creditor, bankruptcy, student loans, and tax levies.

After you see all applicable withholdings and deductions listed on your paycheck, you will arrive at the net pay. This is why you need to know how to read a pay stub! This is the lovely amount landing in your bank account (for about 30 seconds, before it is swept away to pay for your massive cellular bill or your addiction to playing food critic at local eateries).


Besides money taken away from you, your pay stub might include something that can grow over time:  your accruals.  Many people don’t realize that their employer will sometimes show their vacation, sick time, floating holidays, or PTO on their pay stub.  Employers do this so that the information is readily available to employees. That way, employees can easily calculate if they have enough time off to use for one occasion or another.

Don’t over-withhold

Breaking Down Your Paystub image 1

Some people anticipate they will have to pay taxes at the end of the year (instead of receiving a refund), so they elect to have extra money withheld from their paychecks.  Other people like to receive a large tax refund at the end of the year, so they claim zero exemptions.  This exemption taxes them at the highest level.

Many tax experts will encourage people to claim more allowances in order to try to get their tax refund as close to zero as possible.  Why?  Well, simply put, when you get a large tax refund after filing your taxes, you have essentially given Uncle Sam an interest-free loan for over a year.

Does anyone ever offer you an interest-free loan?  Does the government ever offer you an interest-free loan?  Probably not.  So, if you regularly receive a large tax refund each spring, it might be worth your while to talk with an accounting professional to see if it would be lucrative to make a change to your W-4.

Remember State Specifics

Steven Headshot 1
Steven Harris, Managing Partner & Operations Executive, Journey Employer Solutions Arizona

Is providing pay stubs a requirement?  Steven Harris, Operations Executive and Managing Partner of Journey Arizona, provides some insight.

While the Fair Labor and Standards Act (FLSA) does not require employers to provide pay stubs to employees, it is a requirement in most States.  Be sure to check your state’s requirements and always keep accurate payroll records, including hours worked and wages paid to each employee.  With Journey’s HUB Solution, pay stubs and direct deposit vouchers are delivered to employees electronically and securely each time payroll is processed and they stored within the individual’s HUB account for future reference.

To clarify, play it safe and consult your state’s Department of Labor site for requirements.  In Colorado for example, according to the Department of Labor’s website regarding pay stubs, employers must, “…at least monthly, or at the time of each payment of wages or compensation, furnish to each employee an itemized pay statement in writing…”  Online access is acceptable if you ensure employee access to a printer. Not only that but employers also retain these records for a minimum of 3 years.

Related:  Donations: How to Give Charitably through Payroll

Arizona on the other hand, doesn’t specify a method on the Industrial Commission of Arizona website, as long as the employee has access to the pay stub.  When in doubt, check your state’s official (meaning it ends in .gov not .com, .net, etc.) website!

Mark Weaver
Mark Weaver, Owner of Open Door Organizational Solutions

Mark Weaver, owner of Open Door Organizational Solutions, explains how business owners can adjust for operation in multiple states.

My suggestion from a compliance standpoint is that employers who are in multiple states should play it safe since it is vague and varies by state. Provide all the details in the most specific state law for the states they operate in, have employees make an election about how they will receive the statement, and then do it uniform for all employees. Employers who operate only in one state should just stick to what that state requires.

Double-Check Your Pay Stub

At the end of the day, you want to know how to read a pay stub to make sure your paycheck is accurate.  The best way to do that is to review your pay stub and address any concerns.  Know what your FIT tax rate is, and memorize the FICA percentage (7.65%).  Also, inform yourself about any applicable SIT withholdings.

Then, make sure the deductions you have are items you are actually utilizing.  For example, if you’re on your spouse’s health insurance, make sure you don’t have a health insurance deduction!  When in doubt about anything on your pay stub, head straight to your payroll department.

Humans process payroll, and humans do occasionally make errors.  It never hurts to question something you don’t understand, and seeking an explanation from experts will be worth your time.

There.  Now you have the nuts and bolts of Payroll 101, which would probably be a subcategory in Accounting 101. Not only that, you know how to read a pay stub! You are well on your way to complete financial nirvana! Hopefully, reaching financial nirvana will not only give you inner peace but will provide you with a bigger piece of the pie in your bank account.

Subscribe to our newsletter

Get the latest from the world of payroll & HR delivered straight to your inbox!