Guide: How to Understand Your Pay Stub

Difficulty: Easy Time Required: 15–30 minutes

Your pay stub contains critical financial information that affects your taxes, benefits, and take-home pay, yet many people never look at it beyond checking the bottom-line amount. Understanding every line on your pay stub helps you verify you're being paid correctly, catch errors that cost you money, plan your budget accurately, and make informed decisions about benefits and taxes. This guide decodes each section so you know exactly where your money goes.

What You'll Need

Materials:

• Recent pay stub (physical or digital from employer portal)
• Calculator for verifying math
• Your offer letter or employment contract showing agreed salary
• Previous pay stubs for comparison (if available)
• Benefits enrollment documents

Prerequisites:

• Access to employer's payroll system or pay stub delivery method
• Basic understanding of your gross salary or hourly rate
• Knowledge of which benefits you enrolled in
• 15–30 minutes to review and understand each section

Step-by-Step Instructions

Step 1: Verify your personal information at the top

Check the header section for accuracy: your full legal name, address, Social Security number (last 4 digits shown), employee ID, and pay period dates. Also confirm your employer's name and address. Errors here can cause tax filing problems or prevent your W-2 from reaching you. If anything is wrong, notify HR immediately—don't assume it will fix itself.

Step 2: Understand gross pay vs. net pay

• Gross pay is your total earnings before any deductions—what your employer owes you for your work.

  • For salaried employees, this is your annual salary divided by number of pay periods (26 for biweekly, 24 for semi-monthly, 52 for weekly).
  • For hourly workers, it's hours worked × hourly rate.

• Net pay (or take-home pay) is what actually deposits in your account after all deductions.

• The difference between these two numbers can be 25–35% of your gross pay.

Step 3: Check hours worked and rates for accuracy

• If paid hourly:

  • Verify total hours worked matches your timesheet.
  • Check that your hourly rate is correct per your offer letter.
  • Look for overtime hours (typically 1.5× regular rate for hours over 40/week) listed separately from regular hours.

• For salaried employees:

  • Verify your per-paycheck amount: divide annual salary by number of pay periods.
  • A $65,000 salary paid biweekly should show $2,500 gross ($65,000 ÷ 26).

Step 4: Understand mandatory federal tax deductions

• Federal Income Tax: Based on your W-4 form, this can be 10–37% of gross pay depending on income and filing status.
• Social Security Tax (FICA): 6.2% of gross pay up to annual wage base ($160,200 in 2023).
• Medicare Tax: 1.45% of all gross pay with no cap.
• Additional Medicare Tax: 0.9% on earnings over $200,000. These are mandatory deductions you can't opt out of, though you can adjust federal income tax withholding via a new W-4.

Step 5: Identify state and local tax deductions

• State Income Tax:

  • Most states (41 states) tax income at 3–13% depending on state and income level.
  • Nine states have no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming).

• Local/City Taxes:

  • Some cities and counties impose additional taxes (New York City, Philadelphia, San Francisco). Check if amounts match expected rates for your location.

Step 6: Review voluntary benefit deductions

• Health Insurance: Your share of medical, dental, and vision premiums (pre-tax deduction).
• Retirement Contributions: 401(k), 403(b), or similar (pre-tax or Roth). This reduces taxable income if pre-tax.
• Life Insurance: Employer-sponsored life insurance premiums.
• Disability Insurance: Short-term and long-term disability coverage.
• HSA or FSA: Health Savings Account or Flexible Spending Account contributions (pre-tax). These are amounts you chose during benefits enrollment—verify they match your selections.

Step 7: Check for other deductions and verify accuracy

Look for:

• Wage garnishments (court-ordered debt collection)
• Union dues
• Parking fees
• Charitable contributions via payroll
• Student loan payments (if set up through employer)
• Any other employer-specific deductions Add all deductions and subtract from gross pay—the result should equal your net pay. If math doesn't add up, there's an error. Compare current pay stub to previous ones to catch sudden changes.

Step 8: Review year-to-date totals for tax planning

The YTD (year-to-date) section shows cumulative totals since January 1st:

• Gross earnings
• All tax withholdings
• Benefit contributions
• Net pay Use these to project annual tax liability—if you're on track to under-withhold or over-withhold, adjust your W-4. Check that retirement contributions are on pace to hit annual limits if that's your goal ($22,500 for 401(k) in 2023, $30,000 if age 50+). YTD totals should match what appears on your W-2 at year end.

Common Mistakes to Avoid

• Never reviewing pay stubs: Payroll errors are common—wrong hours, incorrect pay rate, duplicate deductions, or benefits you cancelled still being charged. One study found 1 in 8 pay stubs contains errors. If you don't check, you won't catch these mistakes. One missed error costing $50 per paycheck is $1,300 lost annually.
• Confusing gross pay with take-home pay in budgeting: Budget based on net pay, not gross pay. If you earn $65,000 annually but take home $47,000 after taxes and deductions, you have $47,000 to budget, not $65,000. People who budget on gross income constantly overspend because they're planning with money they never actually receive.
• Not understanding pre-tax vs. post-tax deductions: Pre-tax deductions (401(k), HSA, traditional health insurance) reduce taxable income, lowering your tax bill. Post-tax deductions (Roth 401(k), union dues, some life insurance) come out after taxes, so you pay taxes on that income. A $200 pre-tax deduction saves you $250+ in gross pay vs. a $200 post-tax deduction because of tax savings.
• Ignoring year-to-date figures for tax planning: By December, it's too late to adjust your withholding. Check YTD totals quarterly. If federal withholding seems too low based on your tax bracket, you'll owe money in April plus penalties. If too high, you're giving the government an interest-free loan. Adjust your W-4 to get it right—aim to owe/refund under $500.
• Not saving pay stubs for record-keeping: Keep digital or physical copies of all pay stubs for at least 3 years. You'll need them if there's a discrepancy with your W-2, if you apply for a mortgage or loan (proof of income), if you need to verify employment dates, or if there's ever a wage dispute with your employer. Don't assume you can retrieve them later—systems change and access disappears.

Pro Tips

• Set up direct deposit to multiple accounts: Most employers let you split direct deposit between multiple accounts. Send a fixed amount or percentage to savings automatically each paycheck—this "pays you first" before you can spend it. Example: 10% to savings, 90% to checking. On $2,500 net pay, $250 automatically saves and $2,250 goes to spending.
• Adjust W-4 withholding strategically: If you consistently get large tax refunds ($2,000+), you're over-withholding and giving the government an interest-free loan. Adjust your W-4 to withhold less, increasing your take-home pay. Use that extra $150–200 per paycheck to pay off debt, invest, or build emergency fund. Aim for $0–500 refund/owed at tax time.
• Check that you're maximizing employer match: If your employer matches 401(k) contributions up to 6% and you're only contributing 3%, you're leaving free money on the table. Check your YTD retirement contributions and calculate if you're on track. Contributing enough to get full match is the single best investment you can make—instant 50–100% return.
• Use pay stub to verify correct benefits elections: After open enrollment, check your first post-enrollment pay stub carefully. Verify new health plan premiums match what you selected. Confirm FSA/HSA deduction amounts are correct. Check that dependent care FSA contributions are right. Errors get compounded over 26 pay periods—a $50/paycheck mistake is $1,300 lost annually.
• Calculate your effective hourly rate: Even if salaried, calculate what you're actually earning per hour. Divide annual net pay by realistic annual hours worked (include overtime and weekend work). A $70,000 salary ($51,000 take-home) with 50-hour weeks is $19.60/hour actually earned, not the $33.65 people assume from 40-hour weeks. This perspective helps evaluate if extra unpaid hours are worth it.

Related Skills

• How to Create a Monthly Budget
• How to Negotiate a Salary
• How to File Taxes for Beginners
• How to Evaluate a Job Offer