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How to read a pay stub
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[00:00:00]
A spreadsheet of pay stubs
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[00:00:00] Steve: Hello there, dear listener. I am Steve.
[00:00:09] Tyler: And I'm Tyler and welcome to another episode of It's Not About The Money, the podcast where we help you gain the clarity you need to run a successful small business.
[00:00:18] Steve: Tyler has a financial coaching practice. I run a tax business. We are both small business owners like you. And this podcast is our exploration of entrepreneurship one episode at a time.
[00:00:29] Tyler: And Today,
we're talking about something that you will know Steve had to twist my arm to talk about. I'm just kidding. Yeah,
[00:00:37] Steve: No, we're going to talk
[00:00:38] Tyler: no, no, no. What happens before taxes?
[00:00:40] Steve: taxes. Taxes are a part of this. Taxes are in everything. I see taxes in, in like news stories. I'll be listening to, you know, planet money on NPR or something. And it's like, ah, this, this story is about taxes or
[00:00:55] Tyler: Are you hallucinating about taxes? Is that what you're saying? Or you're
[00:00:58] Steve: no, I
[00:00:59] Tyler: like an AI [00:01:00] hallucinates about,
[00:01:00] Steve: No, it's, it's like the, uh, you buy a red car and then you see red cars everywhere that, uh, what, what's that cognitive bias where, so I just, I notice all the stories where like tax incentives shaped the way, uh, a community was built or, or, uh, the way a business grew or, or all that kind of stuff. I see it everywhere.
[00:01:21] Tyler: So what are we really talking about today?
[00:01:24] Steve: We're, this one. Okay, so let's go through like a paycheck. Everybody gets a paycheck when you, when you're a W2 employee. And there's a whole bunch of lines on there and you may or may not know what they are. And so I thought we'd just do a little, just like run down. What are all these lines?
We'll explain them a little bit so you can be a little more informed about where your money is going before it hits your bank account. Because the number is always smaller than, than you, uh, think based on the top line.
[00:01:53] Tyler: Yeah. If
[00:01:53] Steve: I earned all this money and then some of it, it goes away and I don't, I don't know where.
[00:01:58] Tyler: like, what does it feel like? I'm only getting half [00:02:00] of what I earn or whatever, you know? Yeah. Relatable. Yeah. Now, Steve, when you brought up this topic idea for better, for worse, the first thing I said to you was, Oh, great. I've got a spreadsheet for that.
[00:02:11] Steve: Ha ha. I love it.
[00:02:14] Tyler: It's simply a copy of my paste dubs for the last 12 years. So
I just enter them all in.
[00:02:19] Steve: 12 years. That's
[00:02:21] Tyler: Yeah, since 2002, since I got my first, uh, you know, full time job.
[00:02:25] Steve: Mm hmm.
[00:02:27] Tyler: Uh, why do I do this?
Couldn't
[00:02:30] Steve: feel frankly a little ashamed that I don't have a spreadsheet like this.
[00:02:33] Tyler: Actually, I do know why I do it. I do it because, you know, in the early days of my career, uh, my dad was talking to me about money and stuff. And this is just something that he did for whatever reason. And, uh, he was a little extra. He also did it for his utilities going back for all
time,
[00:02:48] Steve: I do have, I do have that.
[00:02:49] Tyler: Oh, you've got one of those? Okay.
That's a very dad thing, perhaps. Uh, I never did that with my utilities, but for some reason I did adopt the PayStub one. And it's a way for me [00:03:00] to, uh, like, I don't know. I guess I had this irrational fear that maybe my PayStubs at my employer's payroll company would go away someday and I would want to have the data for some reason.
I, look, I can't explain this. I just, you know, Tradition. I do it because of tradition and yes, and it's also been a helpful way for me to calculate, uh, the tithes that I want to pay. Cause I do that based off of, you know, how much money I earn. And so it's like serves that kind of secondary purpose, a record first and foremost, and then kind of a little calculator for charity, charitable donations.
So,
[00:03:35] Steve: And it comes in handy when your tax nerd friend is like, what are the lines on your paycheck? Because I want to talk about them on the podcast. So why don't we start like at the top here of the ones that everybody typically has. If you are employed in the United States of America, There's, uh, Federal Income Tax
Withholding,
[00:03:59] Tyler: Mm hmm.
[00:03:59] Steve: Social [00:04:00] Security, and Medicare. Those three will almost always show up, unless you're making less than a certain threshold.
[00:04:09] Tyler: And people refer to that as FICA. Is that true? That like
[00:04:12] Steve: Yeah, Social Security and Medicare together are often referred to as FICA taxes. And FICA stands for, I just read this the other day. Federal Insurance Contributions Act, FICA. And then another acronym that I've sometimes seen for social security is OASDI.
[00:04:38] Tyler: I have not seen that one.
[00:04:39] Steve: And that means old age, survivors, disability insurance. That means old age, comma, survivors, comma, disability insurance, which is sort of a description of what social security does, I guess. So OASDI. [00:05:00] Useful for trivia night.
Federal income tax withholding
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[00:05:02] Steve: So federal income tax withholding is a, uh, a little bit in your control as the employee.
Uh, you fill out a form W 4 that you hand to your employer, and that allows you to specify with some degree of control, how much tax you want withheld from your paycheck. If you don't fill out anything. Um, but the standard stuff, there's a table that the employer, uh, or their payroll processor will use to figure out what percentage to withhold.
But you can say, I want you to withhold a little extra or a little bit less, um, based on, you know, if, uh, a, based on if your spouse has a job and is also employed, or if you have children, um, all those kinds of factors that can figure into it. Uh, but the point with the federal income tax withholding [00:06:00] is this is. It's going to cover your federal tax, income tax burden for the year. And so when you file your tax return, you're kind of reconciling the number that was withheld in all your paychecks throughout the year with how much money did you actually make and how much tax do you owe on that, uh, factoring in deductions or business.
income and expenses or other investment income that is not included on your W 2, all that stuff. You add that all up on the tax return and then figure out, was the withholding on the W 2 sufficient to cover the tax obligation? If so, you get a refund. If not, then you still owe tax at that
point.
[00:06:46] Tyler: Right.
Social Security and Medicare
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So the other two, Social Security and Medicare, are always just a fixed percentage, well, I shouldn't say always because I'm about to tell you the caveats, but Social Security is 6. 2%, [00:07:00] Medicare is 1. 45%, Social Security, uh, caps out when you have 168, 800 of income, at that point they stop withholding Social Security,
[00:07:13] Tyler: They stopped withholding, but do you still owe
[00:07:15] Steve: No, no, you don't. So there's a, there's a wage cap on social security per year. Uh, that's adjusted for inflation. So if you're listening in 2025, the number will be different, but for right now, that's what it is. Um, it, an interesting tidbit here is if you, uh, if you make more than that typically, and you switch jobs in the middle of the year, And your salary was roughly the same, uh, like per annum, 170, 000, let's say.
At both of these two jobs, the, the first job has been withholding the social security tax, and then the second job doesn't know that you've already paid a whole bunch into it. And so [00:08:00] they're required to start back at zero. And so you'll be paying social security tax at the, from the second job as well.
Probably all the way through the year. When you go to file your tax return, the numbers will shake out that you overpaid your social security tax. In the second job, because they didn't know about the withholding from the first job, you'll get a refund of that.
[00:08:22] Tyler: I hope that that piece of information becomes useful to me at some point in my career. Meaning, it'd be nice to have that problem.
[00:08:29] Steve: huh. It has happened to me once or twice,
I think,
so.
[00:08:36] Tyler: so.
nice little, uh, windfall refund
situation. Yeah.
Very
cool.
[00:08:42] Steve: Uh, and then Medicare, uh, is 1. 45%, unless you're over, unless you make over a certain threshold, and then there's an additional, it's like 0. 9 percent or something. Mm hmm. Which I forgot to look up before we recorded. But anyway, if you're in that tax [00:09:00] bracket, you might see that as well. It's a Medicare surtax, I believe that's what they call it. So anyway, more detail than you ever wanted to know about the federal and FICA
taxes.
[00:09:13] Tyler: Yeah, I mean, I was pretty happy just ignoring those and crying when I saw the money go. I'm just kidding. No, that's interesting. It's always interesting to know a little bit more about what goes on behind the scenes here, or what, how the sausage is made or whatever. Mm
State and local taxes
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[00:09:28] Steve: state you're in, there's also going to be some state taxes and they kind of follow the same pattern. There's the income withholding tax. And then, uh, like California has a disability insurance. That might be labeled VDI, uh, or Massachusetts has like a paid family and medical leave tax.
Anyway, every, every state's going to be a little
bit different.
[00:09:50] Tyler: Does
Texas have a Income tax.
[00:09:54] Steve: Texas does not, and there's several other states that also don't have [00:10:00] individual income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington, Wyoming.
[00:10:10] Tyler: Utah does have an income tax, but it's a flat rate, which is interesting around, I think it's like four and a half or five percent. I'd have to google that, but pretty simple to figure out.
[00:10:20] Steve: mm hmm. If you live in a place like Pennsylvania where they also have, uh, if you're in Philadelphia, Philadelphia has city taxes and then the The local, more rural counties also have, uh, taxes at the, the county or the borough or the township level as well. So those might show up on
there as well.
[00:10:43] Tyler: They have income taxes at those levels.
[00:10:45] Steve: Yes.
[00:10:46] Tyler: Oh,
[00:10:47] Steve: Yeah. Penn, Pennsylvania is, is very complicated tax
wise.
[00:10:52] Tyler: Interesting.
[00:10:53] Steve: hmm.
So
[00:10:55] Tyler: I shouldn't say that sad because I don't know how the whole structure works. Maybe the state level is lower to compensate for the [00:11:00] more, who knows? I mean, you probably know, but I am not going
to go there.
[00:11:03] Steve: And some, somebody was asking me the other day, like, should I move from a state that has It's Income Tax to one that doesn't. And I said, well, maybe, but you also have to figure in all the other taxes. Is sales tax higher? Um, are property taxes higher? Yeah, like, uh, from Utah compared to Texas, I don't have the hard numbers on this, but when I moved it, it didn't feel like the tax burden changed a whole lot.
It was just there, there was no income tax, but now there was suddenly a whole lot more property tax than I had. Had Been Paying Before.
[00:11:36] Tyler: They'll get their money. They'll get
[00:11:38] Steve: Exactly. Like, the government's still got to run, so
it just depends which way it gets collected. And you can, you can make arguments about which, which ways are more or less equitable for collecting it, too, so. There's just a lot of, a lot of variety around these 50 states.
Other pre- and post-tax deductions
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[00:11:57] Tyler: So in addition to all these taxes, there are [00:12:00] other things on my pay stub, which are not taxes.
Should we talk about
those?
[00:12:04] Steve: Yeah.
And these ones, uh, are ones, that benefit you a little more directly. So they're more fun to talk about anyway. So which ones, uh, have you seen in the past
[00:12:17] Tyler: well, I'll tell you on my current pay stub, I've got the following, uh, dental insurance, health insurance, an HSA contribution, and a 401k contribution. So these are classified, I guess, as benefits from my employer that I'm also contributing to.
[00:12:35] Steve: health and dental? Yes, the HSA and the 401k, you are contributing pre tax money to an account that you own. The, your, well, your employer may also
be matching
on, on either or both of those potentially. Uh, and that, that could show up there too, but.
[00:12:55] Tyler: I mean, yeah, so this, for me personally, this just represents, uh, the portion of [00:13:00] those tax premiums that I pay versus what my employer pays. And then my contributions to those retirement, you know, tax advantage accounts.
Yeah.
[00:13:08] Steve: Yes,
um,
[00:13:10] Tyler: I actually choose to, my, my contribution for my 401k goes into a Roth, so that would actually be after tax, right?
[00:13:16] Steve: oh yeah, that's a good distinction to make because you can do it either way if your 401k supports it. You can do pre tax dollars, you can do post tax dollars, depending on how you want to structure it. In your retirement planning. That's a whole
separate topic that
maybe we should do some other day, but not right now.
[00:13:34] Tyler: yeah.
[00:13:36] Steve: Uh, good. That covers most of, I've also seen like, um, life insurance or accidental death and disability insurance. Sometimes those show up on there.
[00:13:45] Tyler: You start with your gross income and then you subtract out all these things, the taxes, the other withholdings, and you get your take home pay. Yeah.
[00:13:58] Steve: your bank account. [00:14:00] And then you can take that number and plug it into YNAB and figure out how you want to spend it.
What percentage are you actually taking home?
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[00:14:06] Tyler: exactly. I'm just curious that we don't have to put this in the episode, but I'm just curious what percentage of my gross income, like per paycheck. Like if I look at my net pay, do, do, do
[00:14:21] Steve: column for
that?
[00:14:22] Tyler: it's here, but I don't know the, uh, I don't have a column for the percentage. I've never thought about the percentage cause it's probably going to depress me too much.
But let's see, let's see, do, do, do, and this will be different. For everyone based on, you know, their taxes, tax withholdings and other contributions, whatever. But for me personally, Oh, that's not as bad as I thought. So my take home pay, it looks like is about 67 percent of my gross paycheck. And actually, I don't know if that's good or bad, cause I have nothing to compare it to, but I was afraid it would be less, so my, [00:15:00] uh, unfounded expectations have been exceeded.
Yay.
[00:15:02] Steve: Uh, I wonder Well, hold on, I'll run my numbers, let's see. What was that, uh, grow, uh, take home divided by
gross?
[00:15:14] Tyler: That's what I did. Yeah.
[00:15:16] Steve: Uh, mine is currently around 70%.
[00:15:20] Tyler: Okay. So pretty
[00:15:21] Steve: pretty similar.
[00:15:22] Tyler: And it's interesting because, you know, the definition of take home pay, you could decide, you know, if you're using take home pay as a metric or a benchmark for things like what percentage of my take home pay should I be using to spend on housing or whatever else, right? You may want to not include things like your retirement contributions and insurance premiums.
As part of that calculation, because they're kind of artificially, well, does that make sense? I don't know. So like what I just, the calculation I just did of take home pay is the amount of money that hits my bank that I can spend on whatever I want. But technically my [00:16:00] 401k contribution, my HSA contribution, those are technically optional.
And so their money that I'm choosing to spend on those things instead of on something else. And so if I were like, you know, you've heard these rules of thumb, which I want to say are just rules of thumb, but you know, maybe don't spend more than 28 percent of your take home pay on housing costs or, or whatever.
Right.
Um, I would argue that you might want to go with the higher number for take home pay, like the, you know, what am I trying to say? Like, don't subtract out your optional contributions. When you're trying to come up with that percentage or else you might never be able to afford to live anywhere.
[00:16:36] Steve: I see,
[00:16:36] Tyler: If, if you were trying to follow that rule of thumb, I don't know if that made sense, we don't have to talk about that, but
[00:16:43] Steve: huh.
[00:16:44] Tyler: anyway, well, that was, that was random, I was just curious what percentage of my gross I actually got to see at the end of the day and
67 percent as of right now,
[00:16:54] Steve: the number is higher than I expected. That's a pleasant surprise.
Okay.
How and when to adjust your federal tax withholding
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[00:16:59] Tyler: and that's before we take [00:17:00] into account potential, uh, tax refunds. Yeah. I'm usually pretty on the nose, honestly, but you know, once, you know, depending on the year, depending on what expenses I incur or whatever, sometimes I get a little bit more of a refund than I expected.
So
[00:17:14] Steve: Mm
hmm.
[00:17:15] Tyler: anyway,
[00:17:16] Steve: If you do ever want to, like, go fine tune them, the IRS has a very thorough calculator that you can run through, and at the end of it, it will spit out a W 4 you can hand to your employer if you want. So I'll, I'll put the link to that in the show notes. If you want to get real, uh, nitpicky about your numbers and dial in your, uh, what, what the potential refund might be.
[00:17:45] Tyler: Are there any circumstances or red flags, not red flags, any triggers that people might be able to observe in their life that you might say, Hey, you might want to take a look at your W4 elections or whatever, and adjust those.
Cause I remember I made my elections like, [00:18:00] Many years ago and never had a second thought and I've never thought about it or looked at them again. I guess it's worked out for me because my refunds have been a reasonable size that, you know, I'm not like, Oh, I'm believing like 10, 000 on the table or something like that.
So, so maybe I guess, is that one of them? Like if your tax refunds are very large, you, you might be doing that strategically and you might like that, or you might want to have some of that money in your pocket earlier in the year and consider adjusting the withholdings.
[00:18:29] Steve: yeah, that is the main thing I would say as an indicator of whether you should check, uh, your withholdings is if your tax refund is the size that you want it to be typically. Uh, and if not, then you can adjust the withholding during the year to affect that. And then the other thing would be, uh, if you have a major life change, you get married or have kids or. Uh, take on other dependents, uh, or a [00:19:00] change in your side business income or expenses, uh, that, that, those kinds of things that will affect what your tax liability ultimately is. Uh, you can, you can plug those in and figure out what the withholding ought to be to end up with the refund size that you want. Fun. Well, thanks for letting me twist your arm
on that one.
[00:19:23] Tyler: Oh yeah, it wasn't too hard. I mean, I had a spreadsheet after all,
so I was prepared.
[00:19:28] Steve: Next time we can do, uh, uh, how to read a W 2. Because that's even more cryptic than the, than the pay stub. I'm just kidding. That will be in the
future.
[00:19:40] Tyler: Yeah. We'll spring that
one on people when they're least expecting it.
[00:19:44] Steve: Yeah. We'll do that January 31st, right when everybody gets their W 2s.
[00:19:49] Tyler: There we go. All right. Well, thanks for tuning in and we'll see you next time on another episode of It's Not About The Money.