Whether it’s your first ever one or your one-thousandth, it’s vital that you understand your paycheck, earnings, and wage deductions. I mean, why are there so many different things taking money out of your paycheck? 

My first real job was at Journeys. I sold shoes and listened to music I loved for 25 hours out of the week, all for minimum wage. It was a great first job, but when I got my first paycheck, I was shocked at how much was taken out for taxes and stuff. We all know that taxes get taken out, but why is social security and Medicare taking money too? 

The mental math that I had done to see how much my check would be was off by about $40. Which may not sound like much, but I was broke (I still am), and it bummed me out. That $40 could have been gas money or groceries, but nope. Gotta love growing up.  

Payday is the best day. Seeing your bank account increase by any amount is always a nice feeling, but then you look at how much money was taken out and realize how much money you could have made. So where is your money going?

Two more things to know before we get into all the taxes and deductions you’ll find on your pay stub. There is gross income and net income. Gross income is the money you made before taxes was taken out, and net income is the money you have after taxes. 

The first step in understanding your paycheck is knowing about taxes.


Federal Income Tax

This deduction in your paycheck is the one most everyone knows. The government takes a certain percentage of your paycheck as taxes paid. This is known as your withholding tax. It goes directly to the government and is managed by the IRS. The amount of money that gets withheld from your check depends on how much money you actually make and what you put on the W-4 form you fill out when you apply. The more allowances you put on your W-4, the less money gets withheld, but it comes at a price. (I’ll talk more about this later soon when I write about filing your taxes.) 

State Income Tax 

It’s the same as the Federal Income Tax but on a state level. But not every state has a state income tax. (talk about a rude awakening moving from South Florida to Chicago and now Portland. State income tax sucks.)   


Your FICA (Federal Insurance Contributions Act) tax is separated into two major parts: Social Security and Medicare. 

Social Security

This is a sort of supplemental retirement program. The money we put in now is going to those who are living off of Social Security now. I won’t get into its politics, but the premise should be the same for when our generation retires. (If we ever do.) Social Security is a tax that takes 6.2% of your gross income and your employer matches that 6.2% on top of yours. 


Medicare is similar to Social Security in that it is a policy that benefits the elderly (65+ years old), but instead of a retirement plan, it is health insurance. You pay 1.45% of your gross income into Medicare and your employer matches the 1.45%.

The second step in understanding your paycheck is knowing about insurance and 401K) deductions.

Insurance & 401(k)


If you have health insurance of any kind, whether it’s medical, dental, or life insurance, then you can expect to see it deducted from this portion of your paycheck. What gets deducted all depends on your insurance plan. 


You’re young and probably not thinking about retirement, but if you opened a 401(k), then whatever percentage decided to have taken out of your check will show up here. 

What is a 401(k)? Well, that’s a blog for another day. That’s, in my 23-year-old brain, one of the most adulty things someone can talk about and can’t be summarized in a paragraph. 

The third step in understanding your paycheck is knowing about all the miscellaneous items.

Other Things to Know

Year to Date (YTD)

You’ll probably see a column labeled YTD on your check that has some bigger numbers. This is just the total of a particular deduction that has been taken out so far in that year. It’s just a way to keep track of everything and make sure that the right amount is being taken from your paycheck. 

Paid Time Off & Vacation  

If you see these on your paycheck, this means that your company offers paid time off (PTO) and/or vacation time. At many companies, employees accrue PTO hours while they work. Your paystub will show how much you’ve accrued and what your balance is.


Pay period shows the beginning and ending dates of the days worked. Pay date is just that, the day you’re getting paid. 


The thing with paychecks is while everything is nicely labeled, they’re labeled with codes and not full words. So here is a quick breakdown of those abbreviations. 

FED / FIT / FITW – Federal Income Tax Withheld

STATE / SIT / SITW – State in which you earned money

OASDI / FICA / SS / SOCSEC – Social security tax

MED – Medicare tax

401(k) – Your company retirement plan

Net Pay – This is your total income after taxes and deductions.

Gross Pay – This is the total income before taxes and deductions.

It’s important to know and understand your paycheck. It’s one of the first steps in financial literacy, because when you know how much to expect on each paycheck, you can really start to plan and budget.

Now that you know everything you ever needed to know about understanding your paycheck, take a look at these tips for budgeting your hard earned money  here.

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