How to read your paystub

You're not the only one who gets paid on your payday...

If a direct deposit lands in your bank account every two weeks, there’s a piece of (digital) paper that comes with it. It’s called your paystub.

When money comes in, you use it to pay bills, buy stuff, invest and give to charity. You probably don’t pause to read the paystub. I know from experience that a lot of you aren’t even sure where to find it. That’s totally normal.

Understandably, you tend to focus on the dollars that hit your account. Today we’ll talk about the dollars that don’t. Here’s one of my last paystubs from a previous job (a job I quit to spend more time dropping free advice in your inbox).

Your paystub won’t look exactly like mine, but there will be similarities. First, look at the Year to Date (YTD) column. This allows you to see what has happened in the year, up to this point, and annualize it. I do this for a lot of people when preparing tax estimates. By annualizing the figures, you can predict what will appear on your W-2 at the end of the year.

The other column is the current period. To annualize your paystub, multiply the current period column by how many more pay periods are left in the year after the current period. Then, add that to the YTD column figures to estimate your annual numbers (provided nothing changes throughout the year). Next, you should think through one-time occurrences that haven’t happened yet and account for those, such as a year-end 401(k) contribution or an annual bonus.

Okay, whew. Almost done. Let’s look at the line items. Earnings are at the top. Taxes are in the middle. And other deductions are at the bottom. Your paystub might be formatted differently, but it will follow this pattern.

The top section shows your gross pay. Then we start subtracting taxes that are collected/withheld. The federal tax line is supposed to be holding back enough taxes to pay your federal income tax. This number is based on how you filled out your W-4 form. You will also subtract Social Security and Medicare taxes. Social Security funds a national retirement plan and Medicare pays for healthcare costs. Both of these line items go to benefit people over the age of 65. Lastly, you will see subtractions for state and local taxes. These will vary based on where you live and work.

After factoring out other deductions (401K, HSA, etc), you will see the net pay amount. This is what will actually hit your bank account. Knowing how to read your paystub will help you plan for the future. I suggest taking a look a couple times a year to make sure you are on the right track with your withholdings. You’ll need to account for side hustle money, a new child mid-year, or anything else that will affect your tax return.

I hope you feel empowered to understand your paystub. Use it as a planning tool so your tax results never surprise you.