You probably noticed that your $4,000 paycheck ends up becoming ~$3,000 by the time it hits your bank account. This is because your earnings are subject to certain deductions.
A pay stub is a document generated for each pay period that shows an employee's pay: gross income, taxes withheld, deductions (i.e. things taken out of your pay, like benefits), net pay, and more.
Your employer is required (at least, in most states) to provide a pay stub to show you where that $1,000 or so went so you can ensure you're being paid correctly and understand where your earnings are going. Pay stubs also help employers maintain accurate records of employee compensation to meet legal and tax requirements.
So how exactly does a pay stub work? Where does your $1,000 go? Why are pay stubs important, and how do you interpret what’s on there?
Erika Taught Me
- A pay stub is a document sent by your employer that shows your gross pay, deductions, and net pay within a certain pay period
- Deductions commonly include taxes (federal, state, Social Security, and Medicare), health insurance premiums, and your personal 401(k) contributions
- Pay stubs are important because they establish transparency about your pay
- Most lenders will ask to see your pay stubs going back at least 30 days when you apply for a loan
What is a pay stub?
A pay stub is a document provided by your employer that shows you three main things:
- Your gross pay
- Everything was taken out of your gross pay (i.e. taxes, deductions, and contributions)
- Your resulting net pay
Let’s say you make $48,000 a year. This means that every two weeks, you’ll make roughly $48,000 / 52 x 2 = ~$1,850.
At least, on paper.
In reality, the number that actually hits your bank account on payday will probably be around $1,300.
That’s because before you get paid, your employer automatically withholds certain things from your paycheck. Things like:
- Federal income tax
- State income tax
- Social Security tax
- Medicare tax
- Health insurance premiums
- 401(k) contributions (set by you)
And possibly more.
It’s the job of the pay stub, then, to show you exactly how $1,850 became $1,300 and how the “missing” $550 was distributed.
Why are pay stubs important?
Pay stubs serve three main purposes.
First and most essentially, they show you what you’re really getting paid and where the “missing” chunk of your paycheck went.
Second, they create transparency between employer and employee. That’s why 41 states require employers to provide pay stubs to their employees.
Finally, pay stubs serve as a record of your employment and your income. Whether you’re applying for an auto loan or a mortgage, the vast majority of lenders will ask to see your most recent pay stubs during the loan application process.
Pay stubs are helpful documents that create transparency between you and your employer and show where your earned income is going. You can always request copies of your pay stubs if you’re applying for a loan, and whenever you get one, it’s best to take photos and keep records.
How to read your pay stub?
There’s no standardized format for pay stubs. Unlike 1099s and W-2s, pay stubs can look totally different from one another — so yours might not look like our sample below.
But regardless of how they’re organized, 95% of pay stubs contain the same bits of information listed below.
Your pay period represents the calendar days that are included in this specific pay stub. So it’s counting the 1st, the 15th, and every day that you worked in between.
Your gross income is the total amount that you earned during your pay period. So in our earlier example, a $48,000 salary would have a gross income of ~$1,850 every two weeks. This is how much you earn before various amounts are subtracted.
YTD Gross income, deductions, and net income
These YTD, or year-to-date, figures just show your total gross income, total deductions, and total net income you’ve earned so far this calendar year.
This number represents how much your employer has withheld from your paycheck so that they can pay your federal income tax for you later.
FICA SS Tax
This is the amount your employer has withheld from your paycheck to pay your Federal Insurance Contributions Act (FICA) Social Security tax. You might also see this listed as simply “Social Security” on your own pay stub. Employers and employees alike have to pay social security tax, which helps to support retirees, folks with disabilities, and dependents of both.
FICA Medicare tax
This is the amount your employer has withheld to pay your Medicare Tax, which supports folks on Medicare.
This is how much your employer has withheld to pay your state income taxes if your state even has income tax. For the tax year 2023, nine states have no earned income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Deductions represent all the amounts taken out of your paycheck this pay period. Note that your deductions may also include your healthcare insurance premiums and the amount that you asked your employer to deposit into your 401(k). Sometimes, an employer will list the amount that they contributed to your 401(k). This will typically be listed as a Contribution, not a Deduction since it wasn’t carved out of your paycheck.
This represents your gross income minus your deductions, also known as your “take-home pay,” which you'll receive via direct deposit or check on payday.
Related: How do taxes work?
What’s the difference between gross pay and net pay?
Your gross pay is your total hourly wage or salary earned during the pay period listed on the pay stub. Your net pay is your gross pay minus all the amounts that your employer took out, including your tax withholdings, health insurance premiums, personal 401(k) contributions, and more.
What are deductions and contributions?
Deductions are portions of money that your employer withholds from your paycheck in order to pay federal taxes, state taxes (if applicable), insurance, and other expenses.
Contributions are items that your employer paid — such as your 401(k) match — and are only included on pay stubs for informational purposes since they didn’t come out of your paycheck.
What should I do if I see an error on my pay stub?
Speak with your supervisor or accounting department, and be sure to keep a digital record of that pay stub in case you lose it.
Do I need to keep my pay stub?
Yes. It’s best to keep all of your pay stubs in case you ever need them for loan applications, lawsuits, and more. If your employer offers an online portal to a third-party payroll service your previous paystubs are likely stored there.
What if I’m not getting pay stubs? Is that bad?
Not necessarily. Nine states don’t require employers to issue pay stubs: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Ohio, South Dakota and Tennessee. If you live in a state that doesn’t require them, you can always request them from your employer or even your bank in some cases.