How to Read your first paycheck

Written by Camila Saenz

Getting your first paycheck is exciting; however, it can also be confusing. Between deductions, taxes, and different earnings categories, the number you take home is rarely the same as what you expected. Here’s how to break it down:

1.  Understand Your Earnings

   1. Gross Pay: The total amount you earn before anything is taken out. This is calculated by multiplying your hourly wage by the number of hours you worked, or as a portion of your annual salary if you’re on a salary.

   2. Overtime Pay: Extra pay you earn for working beyond a set number of hours (often more than 40 in a week), usually at a higher rate (e.g., “time and a half”).

   3. Bonuses/Commissions: Additional earnings tied to performance, sales, or company incentives.

2. Paycheck Deductions

   1. Money that is subtracted from your gross pay before you receive it:

      1. Federal Income Tax: Collected by the federal government based on your income level and the details you provided on your W-4 form.

      2. State Income Tax: Collected by your state government (not all states have this).

      3. FICA Taxes – Includes:

         1. Social Security Tax: Helps fund retirement and disability benefits for eligible individuals.

            Medicare Tax – Funds healthcare for people age 65 and older, and certain younger individuals with disabilities.

      4. Other Voluntary Deductions – Could include retirement plan contributions (401(k) or similar), health insurance premiums, or union dues.

3. Withholdings

   1. The amounts your employer sends directly to tax agencies and benefit providers on your behalf. 

   2. Ensure you’re paying your taxes gradually throughout the year instead of all at once. 

   3. Can adjust these by updating your tax forms (like the W-4) to increase or decrease how much is withheld from each paycheck.

4. Net Pay

   1. Also called “take-home pay,” this is the amount you actually receive after all deductions and withholdings. This is the number that’s deposited into your bank account or printed on your check.

   2. Eagle Exchange Tip: If you’re budgeting, use net pay, NOT gross pay, to calculate what you can spend or save each month.