Understanding your Paycheck
Direct Deposit-
Employers directly deposit the employee's paycheck into his/her authorized account. On payday, the employee receives a paycheck stub detailing the paycheck deductions. This method is more secure because there is no direct handling of the check and the employee knows exactly which day his/her paycheck will be deposited and available for use.
Retirement Plan
The amount an employee contributes each pay period to a retirement plan. A specified percentage of the contribution is often matched by the employer. This may be a 401K, state, or local retirement plan.
Net Pay
The amount of money left after all deductions have been taken from the gross pay earned in a pay period.
Deductions
The amount of money subtracted or deducted from the gross pay for mandatory systematic taxes, employee sponsored medical benefits, and/or retirement benefits.
Federal Withholding Tax
The amount required by law for employers to withhold from earned wages to pay taxes. This represents the largest deduction taken from an employee's gross income. The amount withheld depends on two things: the amount of money earned and the information provided on the Form W-4.
Medical
The amount taken from the employee's paycheck for medical benefits. This occurs when the employer has a medical plan for employees, but does not pay full coverage for his/her benefits.
Personal Information
The employee's full name, address, and social security number or employee identification number.
Pay Period
The length of time for which an employee's wages are calculated. Most are weekly, bi-weekly, twice a month, or monthly.
o Fed MED/EE (Federal Medicare/Employee Employment Tax) or Medicare
The nation's health care program for the elderly and the disabled. This tax provides hospital and medical insurance to those who qualify. Medicare taxes are based on a percentage (1.45%) of the employee's gross income.
o Fed OASDI/EE (Federal Old Age Survivors Disability Insurance/Employee Employment Tax) or Social Security Tax
The nation's retirement program. This tax helps provide retirement income for the elderly and pays disability benefits. Social Security taxes are based on a percentage (6.2%) of the employee's gross income. The employer matches the contribution made by the employee.
State Withholding Tax
The percentage deducted from an individual's paycheck to assist in funding government agencies within the state. The percentage deducted depends on the amount of gross pay the employee has earned.
Payroll Card-
The third and newest method is by using a payroll card. A payroll card is a prepaid card that is offered to employees as an alternative to paper paychecks or directly depositing wages into an employee's depository institution account. Most payroll cards are smart cards, which have money electronically loaded onto them each pay period with funds automatically deducted from the balance when a purchase is made. Payroll cards function similarly to a debit card, except the funds are not linked to a checking account. The funds are directly deposited by an employer into an account at a depository institution that is linked to the payroll card. Once the employee's wages are credited to an account, the employee can use the card for ATM withdrawals or to make purchases.
Gross Pay
The total amount of money earned during the pay period before deductions. If a person earns an hourly wage, gross pay is calculated by multiplying the number of hours worked by the wage. For example, if a person works 45 hours in a pay period earning $6.25 per hour, his/her gross pay would be $281.25. If a person is on salary, earning a set amount for a specified time period, the gross pay is the salary amount divided by the specified time period. For example, if a person earns $24,000.00 per year and gets paid once a month, his/her gross pay would be $2,000.00 per month.
Paycheck
This is the most common method. The employer physically provides the employee with his/her paycheck. The paycheck stub is attached to the paycheck to show the deductions. The employee is responsible for handling the paycheck.
FICA (Federal Insurance Contribution Act)
This tax includes two separate taxes: Fed OASDI/EE or Social Security and Fed MED/EE or Medicare. These two taxes may be combined as one line item or itemized separately on the paycheck stub.
Year-to-Date
Totals all of the deductions which have been withheld from an individual's paycheck from January 1 to the last day of the pay period indicated on the paycheck stub.
