November 14, 2018
We live in a world of numbers. They’re on signs, calendars, clocks, microwaves, bills, phones, you name it. Most of the time, we scarcely give these numbers a second’s thought. We’re so used to seeing them, we ignore them and get on with our day. But as you know, some numbers are more important than others—like the ones found on your paycheck. Do you know what all those numbers mean?
Just as importantly, when was the last time you reviewed those numbers?
These days, most people use direct-deposit, meaning their paycheck is automatically put into their bank account. It’s simple, it’s easy, and it gives you one less thing to worry about. But there is some vital information to be found on your paycheck—and if you ignore it, you could be setting yourself up for quite a bit to worry about in the future.
Here’s what we mean. If you were to look at your last pay stub, you’d find the following numbers:
- Your gross pay (the total amount of money you earned).
- Your net pay (the money you get to keep after taxes and other withholdings).
- Withholdings for federal taxes, as well as Social Security and Medicare.
- Insurance deductions (if your employer offers insurance).
- Contributions to a retirement savings plan (if your employer offers one).
Again, since most of us use direct deposit, we rarely review these numbers. But it’s important to know exactly what they mean, where they go, and how to tell if they’re wrong.
Let’s look at some of these numbers so we can understand them better.
Death & taxes, as the saying goes, are the only sure things in life. But death only comes once, while taxes are something we must worry about continuously.
In this case, the amount of federal taxes you pay is based on how much you earn and what sort of allowances you designate on your W-4 form. For example, allowances can be made for yourself and for family members. Generally speaking, the more allowances you claim, the more money you keep and the less you pay in federal taxes. As you can imagine, it’s important that everything is in order here, or you may find yourself paying too much or too little in taxes, which can be a major headache. If this continues over multiple paychecks, your headache will only grow.
Social Security & Medicare
Getting a paycheck is usually a happy occasion—but these two numbers can be very frustrating, especially for younger people. They’re the main cause of the disparity between your gross pay and your net pay.
Still, the law is the law, and the law says that we must contribute a portion of our paychecks to Social Security and to Medicare. In fairness, most of us will come to rely on these programs at some point. But nobody wants to contribute more than they should. Typically, 6.2% of your gross income goes into Social Security while 1.45% goes into Medicare. (Your employer should be matching these amounts.) While it’s rare to see any mistakes, it’s not unheard of for an employer to withhold too much. The important thing to remember is that it’s your responsibility to ensure this doesn’t happen. And the only way to do that is to pay attention to these numbers and check them for inaccuracies.
If you participate in a company-sponsored retirement plan, like a 401(k), then your contributions to it should be automatically deducted from your paycheck. With a 401(k), you choose what percentage of your salary (before taxes) gets deducted, up to a total of $18,500 for 2018. Here again, it’s your responsibility to make sure the amount is correct. This is especially important if your employer matches your contributions. Most employers require their employees to contribute at least a certain amount for matching to go into effect, making it even more crucial that the number you see on your paycheck is the right one.
It’s easy to simply deposit your paycheck and forget about it. But we hope the information we have shared has made it clear how important it is to review your paycheck. You don’t want any mistakes to go on too long or get out of hand. After all, your paycheck is supposed to help you, not hurt you.
Have a great month, and a Happy Thanksgiving!