If you’ve never looked at the anything but the bottom line on your paycheck, or took a look at all the deductions and were too confused to make heads or tails of it, deciphering all the deductions on your paycheck can be confusing at first. Knowing where your money is going is an essential part of budgeting, and it starts with understanding your paycheck.
Understanding Your Income
It’s the foundation for your paycheck (and your career), so understanding income is the first step to commanding a working knowledge of your paycheck.
- Regular pay: This is what it sounds: It’s your pre-tax earnings. If you’re salaried, this amount should be the same from paycheck to paycheck. Hourly workers’ regular pay is based on number of hours they work.
- Overtime pay: If you’re an hourly worker putting in long days, you qualify for overtime earnings for all time over 40 hours in a workweek. By federal law, you receive 1.5 times your regular hourly rate for all overtime.
- Other pay: This represents other sources of income if you earned it. It may report holiday pay, sick pay or other forms of pay not based directly on your work.
- Taxable Wages: This is the grand total of your earnings, and is typically broken out by the federal and state level.
Understanding Your Paycheck Deductions
This portion of your paycheck is a lot less fun than the income portion. It’s also a lot more confusing if you don’t know what each deduction represents.
- Federal Income Taxes: The U.S. income tax system is a pay-as-you-go system. Each paycheck, your employer withholds a portion of your income (the exact rate is based on your earning level) and uses it to pay your portion of those taxes.
- FICA: Shorthand for the Federal Insurance Contributions Act, FICA deductions pay for Social Security and Medicare. You pay 6.2 percent on your first $128,700 in earnings for Social Security and an additional 1.45 percent on all earnings for Medicare.
- State taxes: Much like federal taxes, Colorado taxes earned income at a rate dependent upon how much you earn.
- Other Deductions: Depending upon your employment situation, you may have enrolled in healthcare, retirement, disability insurance and other programs.
- Certain retirement plans (like IRAs) and healthcare decisions (HSAs, for example) reduce your overall taxable income. These amounts are reduced from your taxable wages before deductions are calculated.
Understanding your paycheck gets easier when you become accustomed to tracking them. Your pay stubs aren’t just informational reading for payday, either: Make sure you store them in a secure place. You may need them in the future to secure loans, sort out accounting errors or file your taxes. It’s also important that you have a place to put your money. Keep your money safe and open a savings account today.