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Did you just receive your first paycheck as an immigrant in the US? If yes, your first American pay stub might look confusing to you.
To help you get to know your pay stub and understand all the different deductions and words, here’s a guide.
What is a pay stub?
Your pay stub shows how much you earned and how much was deducted from your salary.
1. Your Gross Pay
How much did you earn during the pay period? Your gross pay shows how much the company paid you before any deduction. This amount includes your regular salary plus overtime, bonuses, and commissions earned for the pay period. Expect this amount to be higher than your take-home pay.
2. Mandatory Deductions
Your employer is required to withhold a certain amount from your pay for taxes and for the items dictated by the Federal Insurance Contributions Act (FICA). These deductions are known as mandatory deductions and it includes the following.
FICA has two components – Social Security and Medicare.
For Social Security tax, your employer deducts 6.2% of your gross earnings, up to $132,900. For dollars you make over $132,900, no social security tax is deducted. For Medicare tax, your employer deducts 1.45% of your gross earnings. Your employer will withhold an extra 0.9% if you make over $200,000 in gross pay per year. You should also know that behind the scenes, your employer is paying an additional 6.2% of your gross pay in social security to the government and an additional 1.45% of your gross pay in Medicare tax. This doesn’t show on your paystub because it doesn’t come out of your pay - it is a cost to your employer only.
Some non-US citizens employed in the US including holders of F-1, J-1, M-1, and Q-1 or Q-2 visa holders considered as non-resident aliens don’t have to pay FICA taxes. Holders of these visa types include students, teachers, researchers, trainees, summer camp workers, au pairs, physicians and other aliens temporarily present in the US. The exemption extends to on-campus student employment and off-campus employment allowed by USCIS.
Take note that if you are holding any of the visa types above, your employer needs to withhold FICA taxes if you have been in the US for more than five calendar years unless your employer is the school, college or university where you study. This is exemption is also known as the student FICA exemption.
Employees of foreign governments holding an A-visa and employees or an international organization holding a G-visa are also exempted. There are also totalization agreements between the US and other nations which exempt some citizens from FICA taxes.
Related Article: Students On An F1 Don’t Have To Pay FICA Taxes
Related Article: Do Aliens Pay Taxes?
Federal Income Tax
Federal income tax refers to the tax you owe to the IRS. The rates will depend on your status (single, married filing separately, married filing jointly or head of household) and your income.
For 2019, Federal income tax rates range from 10% to 37%. The highest bracket applies to single filers and head of households earning more than $500,001. For married individuals, the 37% tax rate applies to joint filers with earnings over $600,001 and for couples filing separately earning more than $300,001 annually. Federal taxes are assessed at graduated marginal rates, which means that different portions of your pay are taxed different amounts. Our blog on the new tax law contains the 2019 tax rates with examples.
State Income Tax
In Washington, South Dakota, Wyoming, Nevada, Florida, Alaska, and Texas, you don’t have to pay for state income tax. In Tennessee and New Hampshire, only interest and dividends are subject to the state income tax. Anywhere else, you have to shell out a portion of your earnings for state income tax.
State income taxes range from 0 to 13.3%. Some are flat percentages of your earnings, as in Pennsylvania where the state income tax is 3.07%, and others are graduated amounts depending on how much you earn. California has the highest state income tax rate at 13.3% for income over $1 million.
Local Income Tax
Your local location like your city or county may also impose a local income tax. Local income tax commonly funds programs for community development, parks, and education.
3. Optional Deductions (Pre Tax)
Aside from mandatory deductions, employees also have the option to ask their employer to make deductions from their payroll including the following.
If you get health insurance from your employer, your contribution (also known as your "premium") will be deducted pre-tax.
Health Savings Accounts
If you have a health savings account (HSA), your employer can deduct the amount from your payroll. For an HSA you need to have a high deductible health plan. A high deductible health plan refers to a plan with a deductible of $1,350 (self-only coverage) or $2,700 (family coverage). You can contribute $3,500 (self-only coverage) or $7,000 (family coverage). If you are at least 55, you can contribute an additional $1,000.
Flexible Savings Accounts
A flexible savings account (FSA) is a plan set up by your employer where you can contribute some of your pre-tax earnings to pay for qualified expenses. These expenses include payment for medical services for you and your dependents. In 2019, you can contribute up to $2,700 to an FSA.
If your employer offers a commuter benefit plan, you may see a deduction for such in your pay stub. Commuter benefits is a deduction that allows you to use pre-tax dollars for expenses like transit passes, parking fees, vanpooling, and bike maintenance expenses. New York City, San Francisco and some surrounding counties, Washington, D.C., and Richmond require companies employing at least 20 full-time employees to offer commuter benefits. Berkeley has the same law which applies to companies with at least 10 employees.
Retirement Account Contributions – Traditional 401(k)
If you're saving for retirement through an employer-sponsored plan, you may also see a 401(k) deduction in your pay stub. Deductions for 401(k) could either be for a traditional 401(k) with contributions coming from pre-tax earnings or for Roth 401(k) which requires after-tax monies. Make sure that your pay stub displays the correct amount and that the money goes to the right 401(k) account. You can contribute up to $19K of pre-tax income to a 401(K).
Optional Deductions (Post Tax)
The voluntary deductions above are made on pre-tax income. You may also request for deduction made after tax. These deductions include:
- Contributions to a Roth 401(k) retirement plan. The total contribution limit to a 401(k), including employee contributions, employer matching, and after-tax contributions is $56K (for 2019). The employee contribution maximum is $19K (for 2019). This means that you can make after-tax contributions of up to $37K ($56K minus $19K) to a 401(k) account if there is no employer matching contributions.
- Premiums paid for disability insurance or life insurance may be deducted from your payroll but the deduction applies after tax.
- All charitable contributions deducted from your payroll are made after tax. You may claim these contributions as a deduction for your income tax return if you decide to itemize.
4. Involuntary Deductions (Post Tax)
Garnishments refer to court ordered repayments for money owed. The court issues the wage garnishment order to the employer. In turn, the employer has to deduct the same from the employee’s salary. Your employer should inform you if there is a garnishment order against your salary.
The court may issue a garnishment order if you have unpaid taxes, fines ordered by the court, default student or credit card debt, or unpaid child support.
5. Your Net Pay
After deducting mandatory and voluntary deductions as well as involuntary deductions, what’s left over is your net pay. This is also known as your take-home pay. This amount is what will end up in your bank account!
What should I do if my paystub has a mistake?
If you notice an error in your paycheck, approach the person in charge of payroll to ask about your concern. Request for further information regarding your concern first – you may have overlooked or misunderstood the breakdown.
If an issue exists, the payroll in charge may also help you find a solution to resolve the problem. Common issues include incorrect inputs for your gross pay, 401(k) contributions, and income taxes withheld (e.g. FICA taxes being withheld for F1 visa, non-resident aliens).
In California, employers have to be more diligent because employees may be “deemed injured” by errors in the paystub. The first violation incurs a penalty of $50 per employee, a $100 penalty is added to subsequent violations. Each employee can claim up to $4,000 under for a pay stub violation. An award for reasonable attorney’s fees and costs may also apply.
What is a W4 Form? How is that connected to my pay stub?
Form W-4 or the Employee Withholding Allowance Certificate is a form you fill out when you join a new company. This form allows your employer to withhold the correct amount of taxes from your paycheck. Think of this as a basis for the deductions on your pay stub.
You also need to accomplish a new W-4 if there are major financial changes in your life such as getting married, buying a new house, or having a baby (also known as ‘qualifying life events’).
What is a W2 Form? How is that connected to my pay stub?
Form W-2 refers to the Wage and Tax Statement your employer prepares every year and sends to you and to the Internal Revenue Service. Think of it as the summary of your pay stubs and taxes paid for the year.
Your W-2 form shows your gross pay, Social Security, and Medicare deductions, as well as the federal and state taxes deducted from your gross pay. It should list all taxes withheld from your pay that your employer pays for in your behalf.
You should receive this form from your employer by the end of January following the tax year. If you haven’t received your W2 by January 31st, contact human resources at your company.
Pay Stubs Deserve Your Attention
When was the last time you checked everything on your pay stub other than the figure at the bottom?
If your contributions are made to the wrong account or you’re withholding taxes are too little, you may end up with a huge headache. Errors left unchecked can add up over time, making it harder to correct when the time comes.
Taking the time to understand every item on this slip will help you find errors in advance. Plus, it can also help you strategize on how to maximize the benefits from your voluntary contributions.