How to decode your paycheck and understand where your money goes


Many young workers are surprised by the difference between how much you technically earn (your gross salary) and how much you get to keep (your take-home, or net, pay).

If you're paid biweekly, after taxes you can expect to net about 70% of your gross pay if you live and work in New York, New York, according to SmartAsset's paycheck calculator. (This figure will vary depending on your location.) If you also have money deduced for line items like retirement plan contributions or health-care premiums, then in general, regardless of your location, you can expect to take home 50%-60% of your gross annual salary, says Philip Noftsinger, a certified public accountant and president of CBIZ, an employee service organization.

"Some of [what affects your net pay] is so personal," says Noftsinger. "If you have a big family, if your employer provides health insurance or not. The flux is pretty big."

Let's break down a paycheck for a fictional woman living and working in New York City. She's single, earns $50,000 annually, and contributes 3% of her earnings to her 401(k) from each biweekly paycheck.

Here's what the paycheck breakdown looks like:

1. Personal tax-related information

You'll see personal, tax-related information like your Social Security number, marital status, and allowances at the top of each pay stub. The amount you're taxed will depend on your allowances. In our example, Jessica has one allowance for herself, meaning she will be taxed more than someone who has several allowances.

Where does the company get that allowance number? When you were hired, you filled out a W-4 form that controls the withholding of federal income tax from your gross earnings. Part of that form is a worksheet to help you decide how many allowances to claim. You can update your W-4 with your employer to adjust your withholding any time.

Pay attention to this section. Withholding too little tax from your paycheck can lead to a big bills and even penalties at tax time, while withholding too much means you're getting smaller paychecks year-round, although you are also more likely to get a tax refund.

2. Earnings

Under "earnings," you'll see the number of regular hours and overtime hours worked. You'll also see the amount earned in each pay period, or every two weeks in this example. Each paycheck will also show your year-to-date earnings. This example uses a first paycheck, so earnings and year-to-date earnings are the same.

3. Deductions

This section shows where the money taken out of your gross earnings goes. There are two kinds of deductions:

Statutory deductions, which are required by law, include federal taxes as well as state, city, and local taxes.

  • Federal: How much your employer will withhold for federal income taxes depends on details like your gross wages, how frequently you're paid, your taxable martial status, and the number of allowances you claimed on your W-4. Contributions for Social Security and Medicare (together known as FICA) take another 6.20% and 1.45%, respectively.
  • State, City, and Local: How much you'll pay here depends on where you work. If you work in one state and live in another, you might find that you have two different sets of taxes taken out.

Personal deductions are other amounts your employer withholds from your paycheck, typically for optional expenses. Those might include contributions to your retirement plan, premiums for medical, dental, and vision insurance, and other benefit offerings from your company.

Check your employee handbook for details on how often the company will make those deductions. For example, health insurance premiums are often split into two equal payments per month—so in months where your biweekly pay cycle means you get three paychecks, that last one will be a bit bigger because you won't have any premiums taken out.

4. Taxable wages

This section shows how much of your pay is subject to taxes. The number will be lower than your gross pay, if you're taking advantage of personal deductions that are pretax—meaning the company takes them out of your paycheck before it calculates your tax burden.

Examples of pretax deductions include retirement contributions, health insurance premiums, and money transferred to flexible spending accounts for health care, child care, and transportation expenses.

5. Take-home pay

Here's where you'll see your final number, which should reflect what's on your paycheck and, if you have direct deposit, what ends up in your bank account.

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