Okay, so you get a paycheck. It is sent to you, sent via email or delivered to you by your archemesis (your supervisor). Or maybe you are the person handing them out. Either way, the scenario is the same. You have in your hand or inbox a document that shows you what you were paid for. And for some, quite mysteriously, there is money taken out of your earnings and given to the government or anyone, and it reduces the amount you have to shop, store or pay bills. It can happen to you every week, every other week or every month. And you take the money left over and do with it what you chose. So why should you care where the extra money goes? It’s gone, right?
But here’s the thing …. where did it go? Did it go in the right amount? How does it affect you? Your spending habits, your budget and the way you save for the future? It’s gone, right? So who doesn’t care where it went, it doesn’t come to you, right? WRONG!
I don’t want to be one of those people to tell you that you can’t afford things, or will ring bells and make funny noises to indicate that something to do with your finances should be important to you. But I will tell you this – it is your money and you have to know where it is going and why.
Now, most of us save on money than our mothers say. (Sorry mom!) Or we think we are. I recently worked with my mom through her financial paperwork and was surprised by the things I take for granted as common knowledge that she was unaware of. She’s a smart woman, so I was a little surprised. So we may be ahead of our mother’s generation in terms of being more financially independent, but ask yourself, where does the money coming out of your paycheck go? Do you know? Do you know what all these fancy little acronyms mean? And why should you take care?
First: the paycheck. And yes, we will review it line by line. But I promise it won’t be torture. We do it quickly and then talk about why you should look at this every pay period and how it affects you.
So what should you look for when you receive your pay stub? You may not like my answer, but the answer is everything. Let me ask you a question. If you lost $ 141.63 from your wallet, would you be interested in it? Would you look for that money? Be honest with yourself, would you panic? Now, I’m not saying you’ve lost those $ 141.63 from your salary, but if you don’t know what it is or where it’s going, it’s as good as lost.
So now for fun! Let’s review this payroll line by line so you can understand what you are getting paid and where those deductions end up.
The first box is Emp #. This is your employee number assigned through the payroll. This one has no relevance unless your HR department asks you to provide it to them as a routine part of how they identify you before talking to you about a problem or issue with your salary.
The next box is company name. It is important for you to know what the legal name of the company you work for is if you have a problem or problem. An example of a problem or problem that would be affected by the fact that you know your company’s legal name would be if you were to apply for workers’ compensation or unemployment. Again, why? Because these agencies refer to the company you work for by their legal name. Doing the same will avoid any confusion when dealing with them.
The next box is the end date for the period. This box is important to check because it specifies the period for which you will be paid. You may be asking yourself, who cares? The answer is – you should. Is the amount paid in line with the period you worked for? In our scenario, we have a paid person, but if you got paid for the hour, how can you know that you have been paid for the hours you worked unless you know what period your employer is paying those hours for?
The next box is Afd. #. Even I will admit that this one is not too important unless your employer deducts things from your salary to work in a particular department. For example, in restaurants, employers may deduct an amount from your salary for uniform maintenance, or you may have a deduction from your salary if a department in that restaurant is allowed to eat lunch while you work, and the employer deducts a fixed amount for food expenditure.
Our next box is the mystery box! It says FW = M 01. Is it an algebraic formula? Is this something Einstein invented? No, this is actually an important box! FW stands for Federal Withholding. M stands for Married, and 01 is the number of dependents required on Form W4. This box drives what comes out of your federal withholding payment and can determine the very important game of whether you receive a refund after filing your annual tax return or whether you will have to send money to the IRS.
What is important to know about this is that the federal withholding deducted from your payroll each pay period is based on a tax table. So the way this is calculated is any payroll system that looks at your gross salary, the frequency you get paid (weekly, every two weeks, etc.), and what you claimed on your W4 to see how much tax you have to take from your check.
The tax table first calculates on the basis of claiming single or married status and then on the number of allowances you have demanded, in our case 01. The general rule of thumb is that single people requiring 00 allowances take the maximum tax and get married having multiple quotas takes less and less tax. We’ll go into more detail about why you should take care of part of this article.
Our next box SS # xxx-xx-0123 again sees something we learned in algebra in high school. It is not. That’s your social security number. What do you need to know about this? You need to know that this is how it should look on your check stub. Or it may look like: *** – ** – 0123. Or it may be all exes or all *. What you should NEVER see on your check stub is your full social security number printed.
Our next box is your name and address. This one is only of concern to make sure it is correct. Sounds simple. Make sure it stays simple. Your company may have different policies for how they get information to you. Most people will at least send your W2 form directly to you at the end of each year. So, make sure your information is up-to-date so there is no disruption to you receiving important tax information. If you move, you must alert the relevant person in your company as soon as possible so they can have your payroll updated.
Below your name and address there are two fields: Check # and Net Pay. The check number is not something to look at. It is the control number assigned by your company. If you place a check or need to talk to someone about your check, they can turn in the information they need in their records. The net salary is the amount of salary that you take home after taxes and deductions have been deducted from your salary.
Our next box is the earnings box. Stay with me here, we’ll get to the good stuff! This box tells you how much you are paid before taxes and other things are deducted from your salary. In this pay stub we have a salary amount (Sal1). However, if you get paid by Hour, you want to make sure that the hours you have told your employer that you worked and the hours on your payroll match. Mistakes can be made in payroll processing, they are not intentional. It is your responsibility to check your pay stub and tell your employer if there was an error in reporting your hours to the payroll company.
Other types of earnings may include commissions, bonuses and even allowances for telephone use, mileage or purchased office supplies.
The next box is labeled treasure. We will review each point in this field to explain the various payroll taxes.
– FWH = federal detention. We gave the example of this above when looking at the SS # box. This is your federal income tax withheld from your salary each pay period.
– FICA = This tax is the tax for the federal insurance contribution. It is taken up by a flat percentage of 6.2% up to an annual revenue. These taxes are taken to provide a range of benefits to qualified workers and their families through the program called Social Security.
– MEDFICA = This tax falls under the federal insurance coverage law and allows an additional 1.45% of your salary to be withheld for Medicare, which provides health insurance for eligible disabled people and people age 65 and older. There is no revenue with this tax.
– ST = State detention. Here in Pennsylvania, this is a fixed percentage tax. In many states, however, withholding tax acts much like the federal withholding tax. It is based on what you claim on your state W4 form. Again, the principle is the same, the tax table first calculates on whether you claim the status of Single or Married and then on the number of allowances you have claimed, in our case 01. The general rule of thumb is that Single requires 00 allowances take the maximum tax and married with multiple quotas takes less and less tax.
– WCHPA = This is the local tax where my business in this example is located. In Pennsylvania, there are thousands of local taxes. They range from 5% to Philadelphia payroll tax exceeding 3%. The tax is based on where you are employed and not where you live. The next state close to Pennsylvania in the number of local taxes is Ohio. Many from this area would be surprised to know that many states have no local taxes.
– PA UNEM = This tax is the Pennsylvania employee’s share of unemployment. This treasure can come and go. In times of high unemployment rates, the state is deducting this tax from employees to help offset the cost of paying unemployment to those who do not have work. Other states have similar taxes, and some also have employees contributing to disability and the state’s paid healthcare.
Next is our deduction field. There are two deductions here as an example of what you could expect to see.
The first deduction is marked MED125. Med125 refers to medical insurance premiums deducted from your salary and run through a section 125 plan as defined by the IRS. What does it mean to you? If you have a health insurance premium deducted from your salary, there are two ways to do it. One is a standard deduction that comes out of your salary after all taxes have been deducted. The second is through a Section 125 plan. If your company has an established 125 plan, your health insurance deduction comes out of your pre-tax salary and is not subject to payroll tax. If you are not sure what your business offers, ask someone in your HR department. Using a Section 125 plan, employees save the cost of paying taxes on their health insurance deduction deductions.
The next deduction is labeled LST. This is the local service charge for Pennsylvania. The local service charge is a tax deducted from your salary up to a maximum of $ 52.00 per. Year. It is collected on a pro-rata basis, determined by the number of pay periods determined by an employer during a calendar year. This tax is used to help offset the cost of emergency services and is also used to reduce property taxes through municipal action in certain municipalities.
Our last paycheck stub is Year to date. Ok, we’re almost done here! This is just in all what has been paid to you and what has been deducted from your salary for the year.
So now the very important part of this exercise is. Why should you take care of all this and how does it affect you?
Well, that’s your money to start with. And yes, it is important to know where it is going. This really is not the day and age when a woman is kept in the dark and her husband takes care of all the financial responsibility while the woman takes care of the house and the children. Most families consist of two working parents. For most people, it is a necessity to meet the rising cost of food, fuel and health insurance, and it is not an opportunity for many mothers to stay home. It is also unfortunate that the divorce rate in our country continues to rise, but it also means that women, like it or not, are almost forced to be financially savvy. So let’s get started with the importance of understanding how your money comes and goes through a paycheck and why you should care.
You earn an amount from your employer. You submit a schedule or type of data to your employer that tells them what work you’ve done or what hours you’ve worked. They take this data and process it through payroll. You then receive a net amount and it is deposited directly into your bank or you take a check to the bank and deposit it every payment day. We have found that there are taxes and deductions taken from your salary and you get what is left. Now that’s why it matters.
Contrary to the popular idea that taxes and deductions are taken from your salary and there is not much you can do about it, there are parts of your salary that you can directly control to put more money in your pocket now!
We will refer back to these checkboxes again and review parts of these taxes and deductions that you have control over. I know what you’re thinking! Not the boxes again, but carry with me. There will be strategies that can help you put money into your family’s hands. It will be up to you to decide what strategies to use and what your comfort level will be with their impact.
So let’s get started.
Ok, the first thing you need to take a serious look at is your federal detention. Let me ask you a question; Are you one of those people who gets a huge refund when you submit your federal tax return? If you are, you can think about what you are doing. By allowing the federal government to spend your money all year, you are missing opportunities. Do you have credit card debt? Does the credit card company charge you interest on your outstanding balance? So why “lend” the IRS your earnings when you have debt to pay? Yes, you get a big refund at tax time, but what if you had spent that money through the year? What would you do with that? Could you pay off debt? Invest it? If you invest that money, you can make money yourself with that money instead of in a money market account instead of letting the federal government use them and then pay them back to you later.
You have to be careful with this one. Think about your comfort level. Are you comfortable spending this money all year, or do you have a need to get all this in a lump sum? If you are not a disciplined saver, the one-time dividend of your money may be attractive to you. Also, make sure that if you decide to take that money now when you check with your accountant or with an online paycheck calculator at least to make sure you don’t reduce your federal withholding too much and end up owe money at the end of the year. It certainly won’t help you reach your personal financial goals, not to mention the IRS frowns on you owing them money. Ironically, isn’t it?
There is another item on your paycheck that is important and can keep money in your pocket – that is your social security number. As we went through the individual boxes on our check stub, I stated that you NEVER need to see your entire social security number on your check stub. Instead, the number must be masked by stars or exes. Why? Because identity theft is a real threat in our society. So if your paycheck gets lost in the mail, that’s bad enough, but if your social security number is on it, you’re just asking for trouble. Check your latest check stub. If you see your Social Security number on your check, contact your payroll manager immediately and they may have that number masked. It should be standard practice with pay providers, but some are not aware of the trends that may affect the end user, namely you.
Another item that can save you considerable money is the MED125 deduction. Many companies have paid their employees part of the cost of health insurance. With the rising cost of health premiums, it has become a necessity for most companies. But how can you pay for your health insurance and save you money? Remember, this health insurance deduction is deducted from your salary and not taxed.
You cannot assume that if you have a health insurance deduction that it falls under a section 125 plan. You need to ask your employer if they have this plan. If they don’t, you can ask them to investigate one. In the past, maintaining a 125 plan was a headache for companies. But now, a plan that only includes health insurance premiums or a single premium plan has little administrative headaches if your part of a company with less than 99 employees.
Another way to save money through payroll is also to ask your HR or payroll if your company has a full flex plan as part of their 125 plan. What does this mean? A full flex plan or flexible spending account as part of a 125 plan gives you a great opportunity to save money. It allows you to withhold a predetermined amount from your salary each year to pay for various medical needs. If you undergo an optional operation, it can be run through the Flex account of your work so that you do not pay taxes for that amount. Many Flex accounts have a list of items for which you can put that money, such as contact solution, certain over-the-counter medicines, and even nicotine patches are refundable. What one has to see with flexible spending accounts is that this is what is called “use them or lose them”. So if you have $ 2000.00 deducted from your salary each year but only file a refund for $ 200.00, you lose $ 1800.00 you contributed. Contact your HR or payroll manager to find out the rules for your company’s flexible spending account.
Another expense that you could run through payroll using your business plan 125 is dependent care. So if you have children who go to a daycare during the week, the amount you pay for the daycare can be run through your paycheck and deducted from you untaxed.
So to summarize this Section 125 plan, when these items are run through your paycheck paycheck (which means that the amounts deducted from you are not taxable), you actually save about 12-15% on health insurance, medical supplies, and childcare. Really think about that statement. If your child’s daycare asked you if you would save 15% on their fees, would you investigate it? If a pharmacy offered you a 15% discount on all purchases, would you go there? This is like an automatic paycheck to save your family money.
My last suggestion is what is missing from our check stub. There is no 401 (k) or simple IRA deduction on our stump. This is savings for retirement accounts taken from your salary and not subject to federal withholding. If your company offers one of these options, look into it. 401 (k) plans are run according to the way your business creates them so the rules are not standardized. However, many companies offer what is called a deductible employer fight that you make in this type of retirement account. If your company offers a match, this is immediate earnings on your contributions. Simple IRA plans require an employer match, so you are guaranteed an immediate return on your investment.
Consider carefully before deciding that you will not participate in one of these plans. If you put a small amount aside, I would venture to say that you will not miss the money per day. Salary base and it will go to secure you financial freedom when you retire.
So now your paycheck shouldn’t just be a piece of paper for you. The mystery of what is being taken out and why has been explained. I would challenge you to think about some of these strategies to put money back in your pocket to see how you can save your family money through payroll. Of course, everyone’s financial situation is different, so review these strategies with your financial professional before implementing them.
I would also challenge you to look at your pay stub every pay period. The more you look at it, the more familiar you become with it and you will begin to know what to expect. When you know what to expect, you get a sense of what you get paid, when you get paid and how you get paid. Knowledge is one of the first steps to becoming more financially savvy.