Paychecks 101

Paychecks 101 | Financial Wellness | University of Colorado

Your paycheck includes valuable information unique to you.

Beyond the bottom line, it contains information about your tax payments, deductions and even your time off! This resource is designed for everyone, not just CU employees, to learn about the ins and outs of paychecks.

There are several different ways that people receive their pay. These include direct deposit into one or more bank accounts, direct deposit onto a prepaid card, a cash payment or a paper paycheck. Your employer will provide payroll options to you when you begin your job, along with any related deadlines and required information for setting up your payroll.

This section provides the details behind how you receive your pay, along with key considerations to make when evaluating your options for payroll. 

Direct Deposit into Bank Accounts

With direct deposit, your net pay is electronically deposited into your bank account(s).  As the employee, you provide the necessary bank account information for where your employer will deposit your pay. Once the pay is deposited, it is available for immediate access. 

Your employer may provide the option for you to allocate portions of your pay to be deposited to different accounts – for example, into your checking account and savings account. This option may be used to help you meet different financial goals related to budgeting, saving and spending.  

Some employers only pay employees electronically. In fact, some states require that state employers pay employees with direct deposit. If an employee does not have a bank account, direct deposit payments can still be made into a prepaid card. View the “Direct Deposit Into Prepaid Cards” section below for more information.

 CU Employees: the University of Colorado pays all employees via direct deposit – you can sign up in the employee portal.  Employees who do not sign up for direct deposit will have their pay issued via paycards.  CU employees can learn about CU issued paycards in the payroll section of the Employee Services website.

Direct Deposit into Prepaid Cards

Prepaid cards (sometimes called paycards if issued by an employer), are an alternative to paper paychecks and traditionally managed direct deposit accounts. With this payment method, your pay will be deposited into your card’s account each pay period. You can then make transactions using the card, withdraw money at a bank or ATM or transfer it to another account.

CU Employees: Consult the payroll schedule for CU employees to confirm the dates and times of payroll deposits.

Prepaid cards may be issued to you by your employer or obtained on your own. Check with your employer to determine if an employer-issued paycard is an option to you, and if so, how to obtain one. 

CU Employees:  if you do not sign up for direct deposit, CU will deposit your pay onto a CU-issued paycard. For more information, click here

 If your employer does not issue paycards, you may obtain one on your own. Prepaid cards are available to purchase online or in-person from several locations, including drug stores, gas stations, grocery stores, banks and other retailers. Prepaid card providers vary and include commercial banks and large retailers (e.g., Walmart). The cards are co-branded with major credit card companies and include different fees, features and rules.

Things to consider when shopping for a Prepaid Card

Prepaid cards, like any financial product, have their own unique advantages and disadvantages. They provide the efficiency and flexibility of digital payments through a non-credit payment option. Most network branded prepaid cards benefit from broad acceptance, and they can be used anywhere the card brand (e.g., Amex, Discover, MasterCard, Visa) is accepted. 

Fees

Prepaid cards can be subject to several types of fees. Before selecting a card, look for fees related to activation, monthly service, ATM withdrawals, card replacement, direct deposit and overdraft, as well as fees for reloading or making transactions. Optional services, such as expedited bill pay, may also be offered for a fee. It is a good idea to shop around and select a card that best meets your needs with minimal fees. 

Overdraft Charges

In general, prepaid cards are set up so that you can’t overdraft; if you attempt to use your card and don’t have enough money in your account it will be declined. However, some cards let you overdraft and will charge overdraft fees. For these cards, users are responsible for keeping track of their balance to prevent overdraft situations.

Level of Service

Available services vary from card to card. Evaluate your options for reloading the card, the ATM network for free withdrawals and online bill pay services.

Features

Prepaid cards may offer a variety of features. Be on the lookout for security features, options to review transactions and balances online, smart phone check deposit, money management tools, optional savings accounts and cash back rewards.  

Lost Cards, Stolen Cards and Fraud

Your rights to recover money from your prepaid card if it is lost, stolen, or falls victim to fraud depend on what type of card it is, what your contract promises and how quickly you report the loss after you discover it. Generally, prepaid cards are protected under the same rules that protect bank debit cards; however, you should always be familiar with the specific policies and rules that apply to your card. Check your card provider’s website to find out the specifics.

Additional Considerations

Currently, prepaid cards are exempt from federal consumer protection laws that apply to credit and bank debit cards in case of billing errors. They’re also not afforded the same legal consumer protections against losses due to hacking. Most prepaid issuers do offer “zero liability” protection to users, but these policies may be weaker than credit or debit card legal protections.

Fund holds: Similar to using a debit card, when you use a prepaid card at a gas station, a hold of as much as $75 might be placed on your account. Similarly, if you use your card to guarantee a hotel room, a hold may be placed on funds paid into the account for at least a few days. When a hold is placed on your account, the amount of money on hold is not available to you until the hold is released.

Paper Paychecks

If you receive your pay by paper check, you’ll need to deposit it in your bank account or utilize a non-bank check cashing service.  After depositing a check, it may take several business days for the check to “clear” and for the funds to become available for your use.  Be advised that check cashing services typically charge a fee. Also, consider that paper checks are susceptible to theft, loss and damage.

Depending on the situation, your employer can charge you for having to reissue a paper check. On a holiday or weekend, you may have to wait until the next business day to cash your check.

Cash

Some employers pay employees directly in cash, or cash could be a component of pay (e.g., gratuity/tips for wait staff). Cash payments are typically gross pay for work without deductions made to meet tax obligations.  If you receive cash payments for your work, you can learn about the requirements for income reporting and making tax payments from the IRS. For example, if you receive cash tips, there are IRS requirements for reporting that income to your employer for tax purposes. For more information on your tax obligations if you are paid by an employer in cash, speak to your payroll department.  Additionally, you might find the IRS webpage on reporting miscellaneous income useful. 

 CU Employees: Please note you will not receive your pay in cash. 

Cash is susceptible to theft and loss and most often not recoverable. If you receive your pay in cash, take measures to protect your cash by utilizing bank deposits or other security measures.

There is what you earn – and then there is what you take home. The total amount you're paid, before taxes and other deductions, is your gross pay. This includes regular pay, overtime pay and other taxable earnings. There are several deductions that can be made out of your gross pay. Understanding them can help you be better prepared and plan accordingly.

There are many different deductions that can be taken out of your gross pay. Taxes (aka “statutory deductions”) are required deductions that employers take out from each of your paychecks as payment toward your annual household tax obligations. 

Employee-paid benefits like health or disability insurance premiums and retirement or flexible spending account contributions are typically listed separately on your paycheck. Some of these deductions may be made as before-tax deductions and some as after-tax deductions. Contact your payroll or benefits office to find out what your options are for before- or after-tax deductions.  

Before-Tax Deductions

While it sounds straightforward, the term before-tax deductions can be a little tricky to understand.  Some deductions are made before both payroll taxes and income taxes are withheld, while others are subject to payroll taxes but not current income tax. 

The IRS determines the tax treatment of deductions. Pretax retirement contributions are not subject to federal or state withholding but are subject to Social Security and Medicare tax.  Health benefits and flexible/dependent care spending accounts can be exempt from federal and state taxes, Social Security and Medicare if you choose for your deductions to be pretax deductions. 

 CU Employees: On your pay advice, your pretax deductions are listed in a separate section for the university. 

It is important to note that while before-tax deductions do lower your taxable income, those that lower your payroll taxes may affect your Social Security benefits when you are ready to retire. When you have pre-tax deductions that aren't used to calculate your Social Security tax, you reduce the wages used to define your benefit amount. To learn more about the potential impact of pre-tax deductions on your future Social Security benefits, look at your Social Security Statement, which provides a projection of your benefits and an annualized listing of your FICA wages. You can view this statement online at the Social Security Administration webpage.

Taxes

Income Taxes

Federal Income Tax Withholding

This money is withheld as prepayment of your annual federal income tax liability. The money goes directly from your employer, on your behalf, to federal tax authorities and is calculated using the number of allowances that you include on your W-4 form.

W-4 Basics

The W-4 form is typically one of the first pieces of paperwork you will complete in a new job – although these days you might skip the paper and complete it online. You should also complete a new one when you’ve had a change in your household, like income or number of dependents. It provides the necessary information to determine how much of your income will be withheld from your paycheck for federal income taxes. The more allowances you include on your W-4, the less will be withheld. Consequently, the accuracy of your withholdings ultimately impacts your annual income tax payment or refund.

Completing a W-4

Your W-4 form can be completed through the employee portal. You may wish to refer to the Completing Form W-4 and Worksheets section of the IRS webpage, which has more details and walks you through the process step-by-step.

  1. Start by completing the “Personal Allowance Worksheet” portion of the W-4 form. This is where, if applicable, you’ll account for a spouse or dependents, child or dependent care expenses and any Child Tax Credits.
  2. If you itemize your deductions when filing your federal income taxes, then complete the Deductions and Adjustments Worksheet on the back of the form.
  3. If you have more than one job or are part of a dual-income household, complete the Two-Earners/Multiple Jobs Worksheet on the back of the form. 
  4. Go back and complete the Employee’s Withholding Allowance Certificate. You’ll need to specify Single, Married, or Married but Withhold at the Higher Single Rate.  Learn more about those options at the IRS website.

Consider whether you will specify an additional amount to be withheld. If you owed taxes when you filed this past year and are using the same withholding amount this year, you can add in an additional amount from each paycheck so that your withholdings more closely match your tax liability.

If you know the filing status (single, married filing jointly, married filing separately, head of household, or qualifying widow(er)) you plan to file under, the IRS has a handy Withholding Calculator that you may wish to use.

 CU Employees: For your convenience, you can complete your W-4 through the employee portal. 

State or Local Income Tax Withholding

If your state or local government has an income tax (not all do), then similar to the federal tax withholding, your employer will withhold a portion of your pay for prepayment of your state or local income tax liability.  Withholding rates and laws vary from state to state. 

 CU Employees:  The state of Colorado uses your federal withholding allowances on your W-4 to determine your state income tax liability. Colorado state income tax is a flat 4.63 percent. Read more about taxes on the Employee Services website.

Payroll Taxes

Payroll taxes are typically paid on your gross income; however, some deductions are taken out before payroll taxes. You might know payroll taxes by the term FICA taxes. The Federal Insurance Contributions Act includes taxes for Social Security and Medicare.

Federal Medicare Tax

All workers must pay 1.45% of their gross income to fund the Medicare health insurance program for the elderly. Higher earning households must also pay the Additional Medicare Tax. Your employer also pays a share of the Medicare Tax, although this may not be listed on your paystub or pay advice.

Social Security Tax

The technical term for this tax is Federal Old Age, Survivor and Disability Insurance, commonly abbreviated as OASDI. While most wage earners must pay this 6.2% tax on gross earnings (up to the annual IRS limit), there is an exception for those who are participating in certain governmental or public employer retirement plans. For more information on Social Security, visit www.ssa.gov. If your wages are subject to this tax, then your employer also pays a share of the OASDI tax, although this may not be listed on your paystub or pay advice.

Imputed Income

The value of certain benefits you receive as an employee may be considered taxable income, even though you are not receiving any additional monetary income. The IRS uses the term imputed income to describe that value. Employer-paid group term life insurance that exceeds a certain coverage value is one example of a benefit that would result in imputed income.

 CU Employees: visit the imputed income section of the Employee Services website for details. 

Special Note for International Employees

International employees must comply with U.S. tax code. To ensure compliance, international employees can work with their employer and if needed, a tax professional, to ensure they complete the proper tax forms and establish correct status. Depending on tax status and responsibilities, international employees may have deductions to their gross pay made for taxes. A number of possible exemptions from income tax withholding requirements may apply to an international visitor.

  CU Employees: visit the International Employee section of the Employee Services website.

After-Tax Deductions

With after-tax deductions, your net pay is reduced but your tax liability and gross income are not impacted. Even if you are eligible to take a particular deduction pre-tax, you may wish to take it after-tax if it will impact your Social Security benefits (as we described in the Before-Tax section).

Other Deductions

Optional Deductions 

Other possible deductions vary and could include payments that are made directly to your employer for things like parking, transit passes, cafeteria charges or charity donations.

Wage Garnishments

If you owe child support, have defaulted on student loans, have unpaid back taxes, unpaid court fines or restitution, you might find that they are automatically deducted from your wages. This information will be included on your pay advice.

Your take-home or net pay is the amount of money paid to you once taxes and other deductions are taken out of your gross pay. 

To better understand your earnings and deductions, visit the Paychecks section of the Personal Financial Check-Up and complete this worksheet

How to Read a Pay Stub (Pay Advice)

Your pay advice is unique to you and includes valuable financial information. The amount and type of information that is provided will vary depending on your employer. Use this section as a reference when you review your pay advice. 

 CU Employees: Learn about your pay advice

There will likely be many abbreviations on your paystub.

Personal Information

Your pay advice will include personal information like your full name, address, employee ID and job title.  Verify that this information is correct and submit any edits or changes to your payroll department.

Hours and Earnings

Your pay advice will include the total number of hours worked for the pay period as well as Year-to-Date. If you are eligible for vacation pay, you may see a line item for that.  Other information may be provided, including your hourly rate. All employees should verify this information.

Tax Data

You should see your payroll and income tax withholdings for the pay period. Your income tax withholdings are based on the information you provided in your W-4 form.

 CU Employees: You may update your W-4 as needed through the employee portal.

Employer-Paid Benefits

These are contributions or payments that your employer has made on your behalf. These dollar amounts are not deducted from your pay. Common examples include the portion of your health insurance premium that your employer pays and any contributions your employer makes to your retirement plan account.

Vacation and Sick Leave

If you are eligible for annual leave, vacation and/or sick leave, your pay advice will likely include a summary of these hours. Look for your starting balance, hours taken and current balance.

Imputed Income

Your pay advice will include any imputed income. The value of certain benefits you receive as an employee may be considered taxable income, even though you are not receiving any additional monetary income. The IRS uses the term imputed income to describe that value. Employer-paid group term life insurance that exceeds a certain coverage value is one example of a benefit that would result in imputed income.

 CU Employees: visit the imputed income section of the Employee Services website for details. 

Net Pay Distribution

Your pay advice will include the final net pay amount.