How to Read Your Paycheck—A Breakdown of What Matters

Understanding your paycheck is essential to managing your finances and avoiding unpleasant surprises at tax time. A typical paycheck contains several sections, each providing vital information about your income and deductions. Here’s an in-depth look at what you should be paying attention to:

Gross Income vs. Net Income

• Gross Income: This is the total amount of money you’ve earned before any deductions are applied. It’s important to understand that this figure isn’t what you take home.

• Net Income: After taxes and other deductions, this is what you actually receive in your bank account—often called your “take-home pay.”

Common Deductions to Watch For

• Taxes: Your paystub will likely include federal, state, and possibly local tax withholdings. These amounts are crucial for determining what you’ll owe or be refunded during tax season.

• Retirement Contributions: If you contribute to a 401(k) or similar retirement plan, those contributions will be deducted from your paycheck. These amounts are tax-deferred, meaning they aren’t subject to taxes right now but will be taxed when you withdraw them in retirement.

• Health Insurance: Premiums for health, dental, or vision insurance are often deducted from your paycheck.

Taxable vs. Non-Taxable Benefits

• Taxable Benefits: Things like bonuses or certain fringe benefits (e.g., a company car for personal use) are considered taxable and must be included in your gross income.

• Non-Taxable Benefits: Benefits such as health insurance premiums, health savings account (HSA) contributions, or commuter benefits are often non-taxable.

Why This Matters for Your Tax Return The details on your paystub will directly affect the numbers you report on your tax return. It’s important to ensure the amounts withheld for taxes are accurate and align with your overall financial strategy. Missteps can lead to owing more than expected—or leaving money on the table. If you’re not sure how to review your paycheck, let’s schedule a meeting to discuss it in detail!