Tips for understanding what's on your pay stub

Whether you've been working for a long time or just landed your first job, read through this guide to become better informed. The more you know, the better you'll be at managing your hard earned money.

Employee taxes

It's hard not to wince when so much of your earnings are being taxed. But those dollars pay for schools, roads and government programs you may need at some point.

This section may say "Employee Taxes" or "FICA," which stands for the Federal Insurance Contributions Act. You'll also find federal withholding and state taxes.

You'll see OASDI, which stands for Social Security's Old Age, Survivors and Disability Insurance. And also Medicare, which provides health care for Americans 65 and older and is also available for younger people with disabilities or individuals with end-stage renal disease.

Tip: If you live in one state and work in another, scrutinize this section to ensure you're not being double-taxed. You can generally expect to file a tax return for your home state, unless you reside in one of the handful of states that don't levy income taxes and don't require one.

Some areas with a lot of commuters who cross state lines have reciprocity agreements. Typically workers get a credit for taxes paid to another state. Talk to a tax professional to determine whether you're required to file more than one state return, especially if you're working remotely.

Withholding

Your withholdings comprise the federal, state and local income tax withheld from your pay.

Be sure to double-check your filing status, which determines the rate at which your income is taxed. The five filing statuses are single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.

Tip: Don't have too much of your wages withheld just so you can get a tax refund. Unless your tax situation changed during the year—maybe you had a baby or bought a home—you're just letting Uncle Sam hold your money interest-free. Some people love a large refund, using it as a forced savings plan. But this strategy could be costing you money if, for example, those funds could otherwise be used to pay down credit card debt or invest.

Pretax deductions

If you want less of a tax bite on your income, this section is for you.

Pretax means the deductions are excluded from your gross pay, reducing your taxable income. Here you'll find your contributions to a pension or retirement plan such as a 401(k) account or the federal government's Thrift Savings Plan (TSP). You might see premiums for medical or dental insurance, or contributions to a flexible spending account (FSA) to help pay for health care or child care.

Tip: Don't get so busy with life that you forget to spend down your flexible spending account. In general, an FSA is use-itor-lose-it, including when you change jobs and at the end of a calendar year. Some plans have a grace period, but if you don't use your FSA dollars within a specific time, you'll lose the remaining cash.

Post-tax deductions

All this tax stuff can be confusing. But it's important. This section will include disability insurance, life insurance, union dues or contributions to a Roth 401(k)—another employee-sponsored retirement plan workers fund with after-tax dollars. With this type of account, earnings grow tax-free.

Tip: If money is tight, you might skip signing up for certain benefits, such as disability insurance. But consider this from the Social Security Administration: About 1 in 4 of today's 20-year-olds will become disabled before reaching 67.

Taxable wages

Realizing how much of your earnings are subject to taxation may induce a weary sigh. Or two.

Look anyway. You should review the amounts listed to see what the government takes out per pay period and year-to-date (YTD).

Tip: You may not like paying into the Social Security system, but trust me: Your older self will be grateful to get that monthly check. The benefits, based on a person's lifetime earnings, are the biggest source of income for most retirees.

Employer-paid benefits

There's more to your paycheck than wages.

This section will include any benefit your employer pays on your behalf. Here you'll find pension information or a possible 401(k) match, or what your employer contributes to your retirement account, up to a certain percentage.

Tip: Don't miss out on free money. If you can, contribute at least enough to get the maximum match offered by your employer. The most common 401(k) match formula is a dollar-for-dollar match on the first 3 percent, and then 50 cents on the dollar on the next 2 percent, according to Fidelity Investments.

Earnings

You probably go right to this section. Makes sense. It's where you will find your gross pay or the money you wish you took home. Your net income is the money left over after taxes and other deductions and paid by check or electronically deposited into your bank account.

Tip: Don't overestimate your ability to afford things based on your gross pay. While a lender will look at the top-line figure to determine how much mortgage you can afford, you don't take it all home. You will overextend yourself if you focus just on your gross income.

Payment information

It can be unsettling to see the difference between your gross pay and what you take home. But keep in mind all those deductions provide needed benefits, such as health care or long-term disability insurance, and eventually Social Security and Medicare.

If you've set up direct deposit, you'll find information about the financial institution where your pay is being sent.

Tip: If your employer allows it, split your direct deposit so the bulk of your earnings goes into an account to pay the household bills and a percentage is earmarked for a separate savings account. This is the best way to build up an emergency fund. You need a rainy-day fund because there always will be financial storms.

Employee information

It's easy to scan this and forget about it. Don't.

A misspelling of your name could be a problem later. Take note of the corporate name, which might differ from the brand under which the business operates. Make a note of your employee identification number.

Tip: If you leave a job, be sure to keep your last pay stub so that you have the information on hand in case you need to prove your employment, retirement contributions or access to a pension.

When you get paid, wanting to focus on the bottom line—how much hits your bank account—is understandable. But your pay slip has a wealth of information—the taxes you pay, the benefits you receive and the withholdings reported to the IRS. Make sure your money is right, and read your pay stub.