Understanding your Earnings

Earnings are the amount of money a worker receives from his or her employer after any required taxes or deductions have been taken out. A document detailing wages earned, taxes paid, and other deductions is called a pay stub. It is usually attached to a paycheck or given to an employee in lieu of a paycheck if wages are received through electronic or direct deposit. In the United States, individual state law determines whether an employer is required to provide workers with a pay stub. The information that must be included on a pay stub also varies by state. In general, most pay stubs include the total amount paid by an employer, the amount of deductions withheld, and the final amount received by the employee.

Brief History

In early human history, labor was often compensated through a barter system. Goods and services were exchanged for other goods and services. In ancient Rome, soldiers were paid with salt rations known as salarium argentum, which is the origin of the modern word salary. Eventually, nations began producing coins and paper money as forms of currency. In the late medieval period, carrying large amounts of coins and cash was both inconvenient and dangerous. Merchants and bankers began transferring money with checks, written documents that could be exchanged for a specified amount of currency. The practice took off in the banking houses of Europe and became popular in the United States in the nineteenth century. Checks became the standard way for employers to pay their workers' salaries.

For most of the twentieth century, workers were paid by paper checks issued by their employer at the end of a pay period. These periods varied from weekly, bi-weekly, semi-monthly, or monthly. As technology improved, businesses were able to electronically deposit a paycheck directly into an employee's bank account. When an employee receives a paper check, it might come with an attached pay stub itemizing the worker's wages and deductions. Employees paid through direct deposit often receive a printed document containing the same information. By the early twenty-first century, most businesses paid their employees by direct deposit.

Overview

As of 2017 in the United States, federal law mandates that all businesses keep accurate records of the hours their employees work and the amount of wages they are paid. However, employers are not required to provide this information to workers on a pay stub. Nine states have no laws mandating that employers provide pay stubs for workers. Some states require pay stubs be issued only with direct deposits, while employers in eleven states must provide workers with printed pay stubs. State laws also dictate the information that must be included on pay stubs. Some states require only the wages and deductions to be listed, while others require a more detailed accounting. Although information can vary, the most common figures included on pay stubs are gross pay, withholdings, and net pay.

Gross pay is the total amount of money earned during a pay period before deductions. If a worker is paid on an hourly basis, he or she will receive a specific amount based on the number of hours worked. If a worker is a salaried employee, then his or her pay will be based on a yearly salary divided by the number of pay periods—fifty-two on a weekly basis, twenty-six on a bi-weekly basis, etc. Some stubs may also show the year-to-date pay, the number of hours worked, and the hourly pay rate if applicable.

Withholdings are an amount taken from a paycheck by an employer and sent to federal, state, and local authorities in the form of taxes. Withholdings can also include voluntary or court-ordered deductions such as health insurance payments, 401(k) retirement account contributions, and child support payments. Many pay stubs will list withholdings by pay period and year-to-date amounts.

As the name implies, federal taxes are paid directly to the federal government. Federal tax rates are based on a percentage of an employee's salary and can be affected by the number of eligible deductions, the amount spent on health insurance, and any money deposited into a 401(k) account. In 2017, the federal tax rate for individuals ranged from 10 percent for those making less than $9,325 a year to 39.6 percent for those making more than $418,400. Individuals making $9,325 to $37,950 were taxed at 15 percent, while those making between $37,950 and $91,900 paid 25 percent. State and local taxes varied depending on the locale. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—did not have any state income tax, while New Hampshire and Tennessee only levied taxes on investments.

FICA withholdings refer to taxes paid to comply with the Federal Insurance Contributions Act. FICA taxes help fund the government-run Social Security and Medicare programs. Social Security is an insurance program that provides funds to retired and disabled individuals. A percentage of each worker's paycheck is taken by the government and placed into a trust fund. When a person retires or becomes disabled, he or she receives a monthly benefit based upon the amount paid into the fund. The amount of benefits received is based upon the age an individual chooses to retire. Americans born before 1943 can receive full benefits at the age of sixty-five; Americans born after 1960 must wait until age sixty-seven. Medicare taxes go to fund health insurance benefits for disabled individuals and people age sixty-five and older.

If an employee is on a health insurance plan, the cost of paying for coverage will be deducted from his or her pay before taxes are removed. Contributions into a traditional 401(k) retirement account will also be removed before taxes. A type of 401(k) called a Roth 401(k) is taxed up front, so withholdings from a Roth account are included in federal, state, and local taxes.

Net pay is the amount a worker receives after all deductions have been removed. If weekly wages are paid by check, the net pay will be the amount of the check. If they are paid via direct deposit, net pay will be the amount electronically sent to the worker's bank account.

Bibliography

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