Understanding Your Paycheck Deduction Codes
One part of your paycheck that directly affects how much pay you take home are the deductions. Read on to learn more about paycheck deduction codes here.
Are you wondering where all the money goes when you get your paycheck? Depending on your tax rates, you may take home about 70-80 percent of your salary, so what happens to the rest of it? With all those codes on your paycheck stub, it’s hard to decipher all the deductions and get an answer to this question.
It’s important to understand your paycheck deduction codes so you can double-check that your paycheck is actually right. Keep reading to learn what all these codes really mean.
What Are Paycheck Deduction Codes?
Your pay stub is an itemized receipt of your pay that allows you to see what your employer deducts. There are typically a series of codes and columns giving you a view of each deduction and a year-to-date snapshot.
These numbers are added at the bottom of the column. You can see how much you are paying in taxes along with your contributions to benefits like insurance, 401k, and others like flexible spending accounts.
Gross Pay vs. Net Pay
You will be able to see your gross pay at the top of your paycheck. This is what you would make without any deductions. It’s your annual salary divided by pay periods (which is typically 26 weeks for bi-weekly pay).
Hourly employees see a breakdown of hours with the hourly rate. This could also include any overtime pay.
Your net pay is calculated at the end of all your deductions. This is what you get in your bank account or the amount of your check. You can then see how much is taken out for each category with your deduction codes.
Your Pay Could Differ
You may not see the same deductions in each paycheck if your employer handles benefits differently. Some choose to deduct insurance premiums monthly vs by pay period. By law, your taxes will come out of each check proportionately.
If you have your pay divided into multiple accounts such as checking and savings accounts, you will see the breakdown of each account’s deposit. Most employees opt for an electronic deposit over a paper check, so you will need to ask your employer for a copy of your paystub to see the breakdown.
There are four tax codes on your paycheck that are mandatory. These rates may be different depending on your salary, employment type, and your state.
1. Federal Withholding Tax (FWT) – this is required for all U.S. citizens. This money goes to different areas of government maintenance throughout the country at a national level. Your salary determines your percentage.
2. State Withholding Tax (SWT) – this is required in most U.S. states in addition to federal taxes. This money pays for government expenses for your state. Depending on your location, you could also have a local city tax for your work location.
3. Federal Insurance Contributions Act (FICA)-Medicare (FIM) – this is a deduction for Medicare. The current rate is 2.9 percent, but you and your employer divide it in half and each pays 1.45 percent.
4. FICA-Social Security(FIO) – this tax is deducted from your paycheck at a percentage of 6.2 percent.
Court-ordered payments are also mandatory, so there could be five mandatory deductions if you have court orders. This includes any child support, alimony, or any other similar payments.
If you move during the year to a different state, you need to let your employer know. You want to make sure you are contributing taxes to the right state.
Benefit Deductions and Employer Contributions
If your employer offers benefits like life, dental, health, vision, and disability insurance, you will see your contributions on your pay stub. These codes can vary but are usually some form of an abbreviation like MED, DEN, or LIFE.
Other benefit deductions are your health savings account (HSA) or flexible spending account (FSA). These are deductions before your pay is taxed.
You will also see your retirement contributions in your benefits section. This is the amount of your paycheck to goings into your retirement savings like your 401K. These are also abbreviated, so you may see RET or 401K.
You may also see some other codes on your pay stub including:
- GROSS – earnings before deductions
- YTD – year-to-date code that shows how much you have contributed
- ACR – accounts receivable if you owe money to the company
- FL – family leave
- HOL- holiday pay for holidays such as Christmas, New Years, Thanksgiving, etc.
- VAC – vacation pay
- FWT – Federal withholding tax
- SWT or SIT – state withholding tax
These codes can vary from one company to another, but you have a general idea of what to look for and how to read it. Abbreviations may also be different.
There are typically two columns that show you what is paid during that pay period and also year-to-date.
If you are a salaried employee, meaning you have a set yearly wage, you will see EXEMPT. Hourly employees paid by the hour are NONEXEMPT.
Employer Benefit Contributions
You may see other benefit breakdowns that are not deducted from your paychecks. Employers may include their contributions to your paychecks, so you can see what they pay. This money does not come out and includes things like taxes, insurance, and retirement contributions.
If you get a direct deposit, you may wonder what a pay stub looks like. A sample paystub shows you want you should look for and gives you a general idea of the layout.
You should review your paycheck stubs occasionally to make sure the deductions are correct. Look up your state tax rates, and divide out your benefit contributions by pay period. Your HR department can help you find this information.
You should use your last pay stub of the year to check against your tax forms like W-2. This is where this information comes from, so you can make sure there are no errors.
Why You Should Review Your Pay Stubs
Even though paycheck deduction codes vary between companies, you should make sure you understand them so you know that your paychecks are correct. You would hate to find out there was an error and it wasn’t fixed.
You can establish a budget by knowing where your money goes with each paycheck. Check out our website for some advice on budget and other lifestyle tips.