This week in the Budget Life! series, we are going to continue our review of a pay stub. In the image above, you will see my pay stub details. I’ve scrambled many of the details, but you can see the main headings. Let’s get back to it.
Pay Stub Details – Deductions
Deductions are broken into two categories in your pay stub details, before tax and after tax. Before tax deductions are those are taken out of your pay check before Uncle Sam gets his hands on your money. After tax deductions mean that you pay taxes on it before it is deducted from your pay check. The advantage of before tax deductions is no taxes. Yippee!. However, after tax deductions are advantageous in the sense that you do not typically pay taxes on the benefit. I’ll explain more below.
- Day Care Reimbursement or Flex Spend Account (Before tax) – If you have to pay for child care or after school care, you can open a Day Care Reimbursement Account and reimburse yourself for those expenses. There is a maximum amount you can put into these accounts and they are a use it or lose it account – so do your homework first. Use it or lose it means that if you don’t use all the money by the end of the year, you will lose it. This year, I will have $3700 in child care expenses. My daughter was in daycare in the spring and that is 100% eligible. She went to summer camp and that was 100% eligible. We have her in a private school for Kindergarten. The tuition is not eligible but the after school care costs are eligible. If I were int eh 25% tax bracket, I would save $925 in federal income taxes.
- Transportation Flex Spend Accounts (Before Tax) – I used this type of account when I was a Financial Advisor and had to pay a monthly garage parking fee. It works the same way as the Day Care Reimbursement Account above. You put money in for transportation expenses, you request reimbursements based on eligible receipts, and your lose any money left over.
- Health Care or Medical Flex Spend Account (Before Tax) – The most common Flex Spend account is the Health Care Flex Spend Account, also known as a Medical FSA. These accounts allow for pretax contributions, use reimbursements (and sometimes debit cards) for eligible receipts and you lose the money if you don’t use it.
- Health Savings Account (Before Tax) – I like to think of a Health Savings Account or HSA as a Health Care IRA. It is similar to the Medical FSV in the sense that you put your money in before taxes and can only spend it on eligible items. The differences are 1) that you need to have a High Deductible Health Care plan (this means you have to pay a large amount of your medical costs before insurance will start paying – usually about $2,000 or more). The second difference is that you don’t lose your money at the end of the year. You can roll it over. That is something to get excited about.
- Health Care or Health Insurance (Before Tax) – With Obamacare, you must now have health insurance. In most cases, your employer is the best source to buy your insurance, but not always. It is always worth your time to check with an independent health insurance agent to see what your rates would be if you purchased insurance on your own. This can be the case if you are young and have no pre-existing conditions. Even though the money is pretax, you will not pay taxes on the health care benefits you receive.
- Accidental Death and Disability Insurance or AD&D (Before tax & After Tax) – If you are killed in an accident or dismembered (i.e. lose and eye, arm, etc) you or your family will get a lump sum pay out. If the premium (amount that is deducted from each pay check) is pretax, then expect to pay taxes on the benefit. That is the general rule of thumb or what I call the Government Always Gets Its Money Rule.
- Life Insurance (Before Tax and After Tax) – Larger employers will often purchase one times (1x) your salary for life insurance as a benefit and give you the option to purchase additional insurance. In most cases, you will not pay taxes on the benefit but there are exceptions.
- Short Term Disability Insurance (Before Tax and After Tax) - This insurance is income replacement insurance if something happens to you that prevents you from working. It typically kicks in after one week of not being able to work and ends after 12 weeks when long term disability insurance starts. The maximum benefit is usually 60% of your salary and the Government Always Gets Its Money Rule applies. This insurance can also be used to provide income during maternity leave but you must purchase the insurance before you get pregnant – one of my former employees learned this lesson the hard way. My wife on the other hand used it to take 12 weeks of maternity leave fully paid (using two vacation days a week for the other 40%).
- Long Term Disability Insurance (Before Tax and After Tax) – This insurance starts at 13 weeks and it is not just for old folks. It will pay out until a government substitute replaces it (i.e. Medicare at age 65) I have a friend who had a stroke in his mid-thirties and has not been able to return to work for more 14 months. The blood clot was caused by blunt force to his neck.
- Dependent Life Insurance (After Tax) – Some employers offer the ability to purchase life insurance on your children. This can help you pay funeral expenses if tragedy ever strikes. The average funeral cost is between $7,000 and $10,000.
- Retirement Accounts/401k/403b (Before Tax) – Most employees have a 401k account where they can contribute pretax dollars to retirement savings. When you retire, you will roll this over into an IRA account and start taking distributions on which you will be taxed. Non-profits offer a 403b plan instead – but it is essentially the same thing as a 401k. If you take a distribution from this account before retirement, you will pay taxes plus a 10% penalty – so don’t do it.
- SEP or SIMPLE Plans (Before Tax) – Smaller companies offer the SEP (for self employed individuals) and The Savings Incentive Match Plan for Employees (SIMPLE) for smaller businesses. These are very similar to 401k plans with a few exceptions that we will not cover int his article (tell me in the comments if you would like this covered in a future article).
- Roth 401k Plans (After Tax) – More and more, companies are offering a Roth 401k option that allows for after tax contributions. Typically a Roth 401k is exactly the same as the 401k with the exception that you pay taxes before you contribute money to these accounts. When you retire and take distributions, they will be tax free.
- 401k Loan Repayments (After Tax) – If you take out a 401k loan, you will pay it back via your pay check and this will show up in the pay stub details. When repaying these loans, you typically have a minimum payment but can pay extra.
- Employee Assistance Programs & Other Charitable Contributions (After Tax) – Many large companies offer employees the chance to contribute funds to the United Way or an internal employee assistance fund. You need to specifically state that you want to make these contributions. If you contribute a large enough amount you may be able to request a tax form at the end of the year so you may write off your contribution.
Government Always Gets Its Money Rule - Uncle Sam wants his tax dollars. If you pay taxes today, you don’ t have to pay taxes tomorrow. But if you pay taxes tomorrow, you don’t have to pay them today. The Individual Retirement Account or IRA is a great example of this. In a traditional IRA, you make your contributions pretax. However, when you withdraw your money, you pay taxes on the contributions and the growth of the money. In a Roth IRA, you pay taxes on the money before you contribute. Thus, when you withdraw the funds, all the contributions and the growth are tax free.
Pay Stub Details – Employer Paid Benefit Subsidy
One of the recent laws passed require employers to list the fringe benefits on your pay stub for which they foot the bill. This is a great way to show you how much your employers pays above your salary to keep you as an employee. You typically will not pay taxes on these items in the pay stub details section.
- Health Insurance - It is common for your employer to pay 5x to 10x times your premium for your health insurance. This is often their second highest expense after salaries. Take note and be thankful.
- Life Insurance – If your employer pays life insurance premiums, these will be noted. In my case, you see two listings for life insurance. This is because I have to pay taxes on the amount that is above the federal maximum coverage.
- Long Term Care and Short Term Disability – When your employer pays part of these premiums, they will be listed here as well.
Pay Stub Details – Miscellaneous
Your employer will customize their pay stub details to meet their benefit offerings and payroll system. Here are a couple other items you may see.
- Net Pay Distribution - This section typically tells you where your pay check is being deposited. In some cases, you can deposit your pay check into multiple accounts. I do this and it is a great way to pay yourself first.
- Vacation Time or Paid Time Off (PTO) - Many companies will list the number of vacation days you have used in the earnings section and how many days that remain in another section on your pay stub details. Sick days are not usually accounted for in the pay stub details.
Without the proper training, your pay stub details can scare away the best educated individuals. However, as a student of money on a budgeting journey, you need to educate yourself. If you see something that you don’t understand on your paycheck, call the number listed in the pay stub details or talk to your boss.
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