My offer said $52,000. Why is my first paycheck so small?

The question

An illustrative letter.

The answer

My dear, you are in very good company. Almost everyone who opens a first real paycheck has the same moment you did: the arithmetic said one thing, and the bank account says another. Nobody took your money by mistake. Most of that missing $500 is still working for you, and once you can see where it went, you can build a budget that fits the paycheck you actually get. The lease is signed, so let's make it comfortable.

Where did the missing $500 go?

Your offer letter shows your gross pay, the amount before anything is taken out. Divide $52,000 by 26 paychecks and you get $2,000, just as you worked out. What arrives in your account is your net pay, what is left after taxes and deductions. In Pittsburgh, a $2,000 paycheck might look roughly like this:

• Federal income tax: about $140, sent to the IRS toward the tax you will owe for the year.
• Social Security and Medicare: about $150. This is a fixed 7.65 percent of your pay: 6.2 percent for Social Security and 1.45 percent for Medicare. Your employer pays the same amount again on top.
• Pennsylvania and city taxes: about $120. Pennsylvania takes a flat 3.07 percent, and Pittsburgh residents pay a 3 percent local earned income tax, 1 percent for the city and 2 percent for the school district, plus a small local services tax of $52 a year.
• Health insurance: about $55, your share of the premium if you joined your employer's plan.
• Retirement savings: about $60, if you enrolled at 3 percent.

Those add up to about $525, which leaves close to $1,475. These are rounded examples, and your own stub will differ with your benefits and choices, but you can see that $1,500 is not a shortfall. It is what a $52,000 salary usually becomes on the way to your account.

Could anything on my paycheck be a mistake?

Usually not, but your first paycheck is worth a careful look. If you started partway through a pay period, it may cover fewer days than a full one, and the next will be larger. Check that your salary, your pay period and the benefits listed match what you signed up for. If a line puzzles you, ask your payroll or human resources office. It is a normal question, and they answer it every week.

How do I read my pay stub?

Most pay stubs follow the same order. Gross pay comes first. Then come pre-tax deductions, such as health insurance and retirement savings, which are taken out before income tax is figured. Then the taxes themselves: federal, Social Security, Medicare, state and local. Last comes net pay, the amount deposited. Beside each line you will often see a year-to-date total, which helps you track the year as it goes. Keep your stubs, at least until you file your tax return.

How do I know my withholding is right?

The federal income tax taken from each paycheck depends on the Form W-4 you filled in when you started. If too much is withheld, you get the difference back as a refund after you file, but you have lent that money to the government all year without interest. If too little is withheld, you may owe a bill in April. The IRS has a free Tax Withholding Estimator on IRS.gov. With your latest pay stub in hand, it takes about fifteen minutes and tells you whether to change your W-4. You can hand your employer a new one at any time.

How do I build a budget on take-home pay?

Start from your take-home pay, never your salary. Being paid every two weeks means 26 paychecks a year, so most months bring two and two months bring three. Many people build their monthly budget on two paychecks, here about $3,000, and treat the two extra paychecks as a gift to savings. That way the ordinary months are covered, and the extra months move you forward.

Then put rent first, because it is your biggest promise. A common measure is to keep housing near 30 percent of gross pay. On $52,000, that is about $1,300 a month. If your lease sits at or under that, you are on solid ground. If it sits above, the other lines will need to be lean for a while. The Budget Planner lays out an example month on two paychecks, line by line, so you can see what is left once rent and savings are in.

Should I lower my retirement savings to get more cash?

Look first at whether your employer matches what you put in. A match is part of your pay, and contributing enough to receive the full match is one of the best returns you will ever get. Money saved before tax also lowers your federal income tax, so $60 into your plan costs you less than $60 in take-home pay. If the first months after the lease are tight, you could pause anything above the match for a little while, but the match itself is worth protecting.

What do I do with this paycheck now?

Remember that the money taken out is not all gone. Social Security and Medicare build your own future benefits. Your retirement savings belong to you. Your health insurance stands between you and a bill you could not pay. And the paycheck that lands is now a number you know, which is the very best place to begin a budget. You have a job, a home and a plan. That is a fine start.

One thing to do this week

Sit down with your first pay stub, name every deduction on it, then run the IRS Tax Withholding Estimator.