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- Understanding Your Paycheck
Being that we are into financial literacy month, I wanted to continue to help people understand some basic personal finance principles. One of the big things that happens when kids get their first part-time job, or their first “real” job out of college is how devastating it can be to see what your first paychecks look like. They often feel like they’ve been ripped off! Haha! Welcome to the world of working as an employee.
As an employee you get to experience your first deductions and withholdings and as a teenager or young adult it can be a total slap in the face!
Understanding all the components of a paycheck is an important part for effectively managing your finances and planning for the future. Here’s a breakdown of the various elements typically found on a paycheck:
Earnings
Gross Pay: Many focus on this. This is your total earnings before any deductions or taxes. This includes your base salary or hourly wages.
Net Pay: Also referred to as “Take Home Pay” This is what can feel like a punch in the gut. But also, what’s the most important. This is the amount you take home after all deductions have been subtracted from your gross pay.
Overtime: Some employees can earn additional pay for hours worked beyond the standard workweek, often calculated at 1.5 times the regular hourly rate.
Commissions: Depending on your job, you may also have earnings based on sales or performance, common in sales positions. This can vary widely from paycheck to paycheck depending on performance.
Bonuses: If you are fortunate, and depending on the company you may even receive extra pay awarded for performance, milestones achieved, or as part of your total compensation package. Remember, don’t rely on this type of compensation. Don’t spend it before you have it 🙂
Deductions
Deductions reduce your gross pay and are categorized into mandatory (taxes and government fees) as well as some voluntary deductions.
I think it’s also important to understand, as we start to see these deductions from our hard-earned pay check, some are after-tax deductions and some are pre-tax, or before tax. These two key categories of payroll deductions impact your take-home pay and taxable income differently.
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