Do you know what type of information is on your pay stub? If not, take a look at your most recent one and see if you can understand what’s on there. It contains a lot of good information. Until recently, I also did not pay too much attention to my pay stub but after asking myself some tax questions, I needed to take a look at my pay stub to answer them. What I realized is that to help strategize your finances and taxes, the answers are in your pay stub. How often do you look at your pay stub?
What’s on your pay stub? Here are things you might see
- Net pay
- Federal taxes
- State taxes
- Local taxes
- Retirement contributions
- Social security taxes
- Medicare taxes
- Leave balance
- And more
That’s great that I see all the taxes I pay. What is it that I should be paying attention to? Here are a few reasons:
Anticipate your tax bracket
You know how much your grossed per pay check. You also know how much you grossed year to date. If you can estimate what your deductions are, you can estimate what your taxable income is going to be. If you’re on the border between one tax bracket and the next higher bracket, you’ll likely want to stay in the lower tax bracket to pay less taxes.
Know how much taxes you’re paying
Are you paying enough taxes? Are you paying too much? If you look at how much federal and state taxes you pay compared to how much your taxable income is, you can get a sense whether you’re paying too much, paying too little, or paying just enough. If you’ve paid too much throughout the year, you’ll get a refund and if you paid too little you’ll owe. If you owe, you’ll want to owe as little as possible. You don’t want to owe thousands of dollars when it comes to filing your taxes because it’s a big amount to pay at one time. You can adjust your federal and state tax withholdings throughout the year. You can also withhold additional money from your pay check automatically.
Monitor your retirement contributions
Your employer might have a 401K program and they might even match a percentage of it. If you aren’t contributing enough to receive their matching contribution, you might be missing out on free money. Another reason to monitor your retirement contributions is so that you don’t over contribute. There is a maximum amount you can contribute. In 2020, the maximum contribution amount was $19,500. One way to reduce your taxable income is to contribute more to retirement, without going over the limit of course. If you contribute more to a pre-tax retirement account, you can lower your taxable income. If you’re on the borderline between two tax brackets, this method may help.
In addition to your pre-tax retirement account, you also have the option to open up a after-tax retirement account e.g. Roth IRA. There are income limits you must be below in order to contribute to a Roth IRA. Knowing what your estimate gross income is will help you know if you are below the limit window.
If you think your pay stub has useless information other than what you’re getting paid, think again. It has valuable information that can help you steer towards forecasting and strategizing your finances and taxes. Take a look at your pay stub and see if you can make out any valuable information from it. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook, Instagram, and Pinterest.
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