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Understanding Your Paycheck

Greg Tonsul
Greg Tonsul Greg Tonsul is the Outbound Sales Manager at Consumers Credit Union.
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It can be a bit disheartening to work hard all week, only to discover how much of your pay was withheld. If you have ever looked at your paycheck and didn’t know the meaning of each part of it, it’s time to learn.
It can be a bit disheartening to work hard all week, only to discover how much of your pay was withheld. If you have ever looked at your paycheck and didn’t know the meaning of each part of it, it’s time to learn.  Some of your paycheck withholdings are mandatory, while others are voluntary.

Basic Terms

YTD = Year-To- Date – You will often see this in categories such as pay, deductions, and taxes.

Pay = your gross pay – What you earned before taxes are taken out

Deductions = Benefits you share the costs of with you company such as healthcare.

Income Taxes

The federal government and most of the states impose a tax on individual income. These systems are administered on a pay-as-you-go basis, which means you have to pay taxes on your income as it is earned. Your employer is required by law to withhold local, state and federal income taxes from your paycheck and send that money to the government on your behalf. You can control, at least to an extent, how much income tax is withheld by making adjustments to your Form W-4. The Internal Revenue Service recommends reviewing your W-4 anytime you have a major life change, such as a marriage or a change in the number of your dependents.


The Federal Insurance Contributions Act, commonly referred to as FICA, includes two separate paycheck withholding components, including Social Security and Medicare. Withholding for the Old Age, Survivors and Disability Insurance program, or OASDI, is commonly referred to as Social Security and amounts to 6.2 percent of your paycheck. Your employer is also required to kick in a matching 6.2 percent for a total contribution of 12.4 percent. Your boss also has to withhold 1.45 percent of your pay for Medicare, and pay a matching amount, for a total of 2.9 percent.

Miscellaneous Mandatory Withholdings

In addition to state and local income taxes, each state might have its own batch of mandatory withholding requirements. For example, you might have withholdings for state disability, retirement or unemployment insurance. Your employer might be required to withhold amounts from your paycheck based on a court order, such as for a wage garnishment or for child support.

Retirement Plans

Not all of your paycheck withholdings are mandatory. Your employer might offer to withhold a portion of your paycheck to help fund your retirement plan on a voluntary basis. For example, you may elect to have a portion of your paycheck contributed directly into a tax-advantaged 401(k) plan.

Health Care

Your employer might offer to withhold money from your paycheck to go toward a number of different health care options. For example, if you participate in a company-sponsored health or life insurance plan, your employer will withhold your portion of the premiums from your paycheck. You might also have the option of contributing to a flexible spending account, short-term disability plan, health savings account or dependent care account.

Miscellaneous Voluntary Withholdings

You may elect to pay your union dues through paycheck withholding. The U.S. Department of the Treasury makes investing in U.S. savings bonds easy by signing up for the Treasury Direct Payroll Savings Plan. Your employer might offer to automatically withhold fees for other services, such as parking or membership dues for professional organizations. You might be able to contribute directly to charitable organizations through payroll deduction.

Disposable Income

Whatever is left of your paycheck after taxes are withheld is called your disposable income.

Discretionary Income

Some people use the terms “disposable income” and “discretionary income” interchangeably, but they are different. Discretionary income is what is left over after all necessary spending and savings are taken from the disposable income.

Knowing why and where the money from your paycheck has gone might take some of the sting out of it. If you don’t know where your money is going and why, you could possibly be missing errors that have been occurring that need to be rectified.