Give your paycheck a checkup: Paycheck deductions explained.
Payday can be one of the most exciting days of the week (or month). But making sense of the money deducted from your paycheck before your actual take home pay can be confusing, especially if you’re a new employee. Understanding what those deductions mean — and how much control you have over them — can put you in a better position to save for the future, lower your taxable income, and make the most of your earnings.
What are paycheck deductions?
Paycheck deductions are a portion of your earnings withheld to pay taxes and certain employee benefits. Some of these deductions represent money your employer is required to withhold every month, like taxes, while other deductions may include benefits you sign up for voluntarily through your employer, like health insurance.
What information is on a paystub — and what does it mean?
Your paycheck shows your gross pay — the total amount earned before any deductions — and your net pay, the amount of your take-home pay after all withholdings. Here are different types of deductions you might see on your paycheck, as well as the tax categories they may fall under.
Mandatory deductions
- Federal tax withholding based on the information you provide on your W-4 (see below)
- State and local income tax if applicable, based on where you live
- Federal Insurance Contributions Act (FICA), which includes Medicare and Social Security based on a percentage of your income
- Wage garnishments if applicable
Voluntary deductions
These optional deductions require employee consent and may include:- Health insurance
- Retirement plans
- Group term life insurance
- Commuter plans
- Childcare
- Health savings accounts (HSA) and flexible spending accounts (FSA)
Voluntary deductions fall under two categories:
Pre-tax deductions are taken before any taxes are withheld, lowering your overall taxable income. These can include health insurance, HSAs, FSAs, group term life insurance and certain types of retirement plans, like a 401(k).
Post-tax deductions are taken after all required taxes are withheld and do not reduce your overall taxable income. These include certain retirement plans like Roth 401(k), disability insurance, union dues and donations to charity.
Your paystub may include other information too, like sick and vacation time balances, filing status according to your W-4, pay period dates, current earnings and year-to-date earnings.
How to determine your tax withholding for your paycheck
The information you provide on your W-4 form determines how much your employer withholds from each paycheck for federal income taxes. You can use the IRS Tax Withholding Estimator to help you determine the right amount of allowances to claim on your W-4 form.
It’s a good idea to review your W-4 withholdings after a life event like getting married, adding a dependent, buying a house or whenever your financial situation changes, so your withholding amount more accurately reflects your tax liability.
Your employer will also withhold state and local taxes if applicable, based on how much you earn and the tax rate where you live. Residents of certain areas, including Kansas City and Saint Louis, may also see paycheck deductions for a 1% city earnings tax.
Other facts and considerations about paycheck deductions
Be sure to carefully review your first paystub from a new employer to make sure the information is accurate. Confirm that the spelling of your name, your address, Social Security number, taxes and other deductions withheld are correct. If you spot an error, notify your Human Resources department immediately.
Here are a few more things to be aware of:
- Contract or seasonal workers may not see any paycheck deductions and will be responsible for paying quarterly taxes to the IRS.
- Employee bonuses are often subject to different withholding rules, which may result in more earnings withheld.
- Consider adjusting your voluntary deductions according to what works best for you and your budget.
- Consider increasing pre-tax deductions that help you save for retirement, especially if your employer offers to match a portion of your contributions. Contributions to an HSA or FSA can also help you save for future expenses while lowering your tax bill.
- Save your last paycheck of the year to compare your annual earnings and deductions with your W-2.
Checking your paystubs regularly can help you track where your money goes and help ensure you’re using your withholdings and voluntary deductions in ways that best align with your budget and financial goals.
Did you know? Commerce Financial Advisors can answer your retirement planning questions as well as help you prepare for and track your financial goals. Contact us to learn more or to find a financial advisor near you.
Commerce Bank does not provide tax advice. Consult your tax professional for guidance.
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