TAXTEMBER: Understanding your Paystub

TAXTEMBER: Understanding your Paystub

September 12, 2022

If you are currently a W-2 employee, analyzing your paystub can give you a great insight into what your tax bill will be in April and if changes should be made.

A lot of Americans make a determination on how the tax process went whether they have to pay the IRS or get a refund.   The reality is that a large part of taxes is paid throughout the year by the withholding of taxes at your job.   You can see how much was withheld on your paycheck by reviewing line 25a on your 2021 1040 Tax Return. 

The first area, of course, is to review is the income or salary section.  Are you getting paid the correct amount?

Next let's move to all the subtractions on our paystub:

If you had to write a bigger check to pay your taxes than you wanted then you will probably need to submit a new W-4 to change your withholding levels.  Use the IRS Tax Withholding Estimator.  It is a little more complicated than in the past so also having a discussion with the HR department can help. Now the reverse could also be true if you received a large refund and want to have more money back on each paycheck instead of that large tax refund.  

You can just peruse the FICA and Medicare tax section.  Your payroll provider should be able to calculate that tax correctly.  The rate for Social Security for an employee is 6.20% and the Medicare rate is 1.45%.  If your income exceeds $147,000 in 2022 you will no longer have to pay the Social Security tax after exceeding that amount.  That base limit tends to increase a little bit every ear.  So, if you notice a bump in your paycheck during the year it could be that you have exceeded the Social Security limit.

If your employer offers a Health Savings Account, your contributions are excluded from income taxes.  We focused on HSA accounts last Taxtember.

The other area to view on your paystub is the amount of your contribution to a retirement plan.  A lot of employees state they are "maxing out" their 401k because they are putting in 6% and are receiving a company match of 6%.  That really should be viewed as the minimum contribution.  Take the free money of the company match, but then determine if you can contribute more to your retirement plan.  The actual dollar limit for 2022 is $20,500 for employees under the age of 50 and $27,000 for those over 50.  If your employer offers a SIMPLE retirement plan the limit is $14,000 and $17,000 for employees over 50.  Remember if you are contributing to a traditional retirement plan (non-ROTH) then your contribution is considered pre-tax and you will not have to pay taxes on your contribution today.  (When the money is withdrawn at retirement, then taxes are paid.).  So, by increasing the amount of your contribution, your taxes will go down.

Here is a different way to look at your contribution if your employer has a ROTH 401k option. If you make a $10,000 pre-tax contribution the net amount at a 25% tax bracket is $7,500 for you and $2,500 for the government (taxes).  If you make a $10,000 contribution to an Employer ROTH retirement plan, the net amount is $10,000 for you and $0 for the government (since it is a post-tax contribution.)  So, you are actually able to contribute more into a ROTH type account for you over a Traditional employer retirement account.

Reviewing your paystub periodically just makes sense and it can help you understand the taxes that you are paying each year.