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Everything You Need to Know About Your First Paycheck

A young brunette woman uses her smartphone to take a picture of a check to deposit to her bank account remotely. She’s sitting in a coffee shop with bright sunlight shining in the windows behind her.
Posted on by The Money Mill

Getting your first job is an exciting time, and a whole world of opportunities open up. Now you can start saving for your first car, saving for your future education, or are able to just grab lunch with friends when you want. It can also be a bit overwhelming, and you might have a few questions. What’s with the money being taken out of your check? What do you need to file taxes at the end of the year? This is why it’s important to familiarize yourself with some basics of earning an income. Here are a few concepts that will help you along your way.

What is a paystub?

A pay stub is a document that summarizes how your total earnings during a specific pay period were distributed. It is generally broken down into three main sections: how much you are being paid, the taxes you are paying, and any other deductions that are being made.

The amount you are being paid for the current pay period will appear first, whether it’s weekly, biweekly, twice monthly, or monthly.

If you work by the hour, your hourly rate, number of hours you worked during the pay period, and overtime hours will be shown. If you earn an annual salary, you’ll see your salary for the pay period and bonuses or commission, if applicable.

Why is a pay stub important?

  • It serves as a point of reference and accountability for both the employee and the employer
  • Understanding your paycheck is crucial to being able to budget your money
  • Knowing your gross, year-to-date, and net earnings will prevent confusion

How do you get a copy of your paystub?

If you don’t receive physical paychecks, they are generally easily accessible. In most cases, you can retrieve them digitally by logging into your company’s payroll website. You were probably given access to it along with login information when you were initially hired.

If you are unsure about login information or where to find a pay stub, you can ask your manager or someone in the human resources department to assist you. They will likely provide you with online access or give you physical copies of the pay stubs for a given pay period.

What is on a paystub?

  • Basic personal information (Name, Social Security Number, Employee ID Number)
  • Pay period
  • Hours worked
  • Gross pay
  • Year to date
  • Deductions
  • Net pay or net income

Deductions

Earnings and net pay are not the same. Earnings, or gross pay, refers to the amount of money you made in total. Net pay is the amount of money you “take home” after the deductions are taken out of your paycheck. Deductions are subtracted from your gross pay to give you your net pay.

Deductions include taxes, insurance premiums, and other federal retirement programs like Social Security and Medicare. Let’s go through a few of these.

Social Security and Medicare

Everyone pays into Social Security, a federal government retirement program that you can receive when you are at least 62 years old, and Medicare, a federal health insurance for anyone age 65 and older, and some people under 65 with certain disabilities or conditions.

Insurance

If you elect to get insurance through the company’s insurance provider, you will see these deducted from your gross pay, evenly divided over the amount of paychecks you receive in a year.

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are programs designed to allow people with health insurance to put money aside pre-tax for qualified health and medical expenses.

Federal Income Tax

The government withholds a percentage of the money you earn in a year to ensure you have the funds to pay them when taxes are due, this is how:

  • Your employer reports your annual salary as well as the number of dependents to the federal government
  • The Internal Revenue Service (IRS) works out an estimate of how much federal income tax you should pay for a given year and divides this by the number of paychecks you will receive (generally 12, 24, 26, or 52)
  • They deduct this amount from each paycheck. The same process applies to hourly employees—if you are paid hourly, your employer will estimate your monthly income, and you will have a percentage of your pay withheld for federal income tax

Sometimes, the amount of federal income tax deducted from your earnings may be too high or too low. This could be due to a job change or the birth of a child, for example. If you have paid too much tax, they will calculate the amount you are due and pay you a refund. If you have not deducted enough throughout the year, the IRS will request the remaining amount due.

At the end of the year, you will receive a Form W-2 from your employer, used to file your taxes. Form W-2 reflects your income earned and taxes withheld from the prior year to be reported on your income tax returns. Employers use W-2s to report FICA taxes for employees and the IRS uses W-2 forms to track individuals’ tax obligations.

Note: Not every worker gets a paystub. Independent contractors are a category of worker that are not considered employees of a company, but are paid compensation by that company. Instead of a W-2, these folks get a 1099-NEC. If you receive a 1099 form, you have to set aside money to pay your taxes, as none of your income is automatically withheld for you.

How do you file your taxes?

This is easier asked than answered. There are countless ways to file and tips and tricks to try to minimize how much you pay in taxes, depending on your particular situation. Thankfully, taxes tend to be rather simple when you’re just starting out. Here are the basics.

  1. You will need the forms and receipts that show the money you earned and the tax-deductible expenses you paid. These include:
    1. A W-2 form from each employer
    2. Other earnings and interest statements (1099 forms)
    3. Receipts for charitable donations; mortgage interest; state and local taxes; medical and business expenses; and other tax-deductible expenses if you are itemizing your return
  1. Choose your filing status. Filing status is based on whether you are married. The percentage you pay toward household expenses also affects your filing status.
  2. Determine if you are taking the standard deduction or itemizing your return.
  3. Decide how you want to file your taxes. The IRS recommends using tax preparation software to e-file for the easiest and most accurate returns. If you file by mail, it can take up to 6 months for the IRS to process your return.
  4. If you owe money, learn how to make a tax payment online, including applying for a payment plan or find out how to pay taxes by check or money order and where to send it.
  5. Submit your return by the filing deadline.

 

There is a lot to know about earning your first paycheck, but the more you understand these concepts, the better prepared you will be going into your working life. Subscribe to the Money Mill Blog for more information about saving & investing, budgeting & financial education, fraud & identity theft and more!

 

Jameson Davis is a Jeanne D’Arc Financial Wellness Specialist. Jameson works to educate individuals inside and outside the classroom. This includes the Save-at-School Program, which gives school-aged children the opportunity to learn the valuable lesson of creating good saving habits at a young age. Jameson has been in the industry for more than seven years and has experience educating members on how to become financially successful. He is dedicated to providing a stronger knowledge base in financial decisions to students, the community, and professionals alike. You can find out more about Jameson and the rest of the Financial Wellness team here.