Blog | Burney Wealth Management

Paystub Analysis: How to Avoid Tax Penalties

Written by Brenna Surette CFP®, RICP® | 7.25.2023

A paystub is an important, yet often neglected, document. In a world of direct deposits and electronic delivery, paystubs are often left gathering virtual dust. It can be tempting to assume that all is well and move on, but this one page can actually hold a plethora of valuable information as it relates to your taxes and financial situation. Scheduling a dedicated paycheck review can provide helpful insight to your income, automated tax withholdings, retirement savings, various insurance costs, and more. Armed with your paystub, you’ll be ready to uncover potential pitfalls and dodge penalties. 

We will walk through a list of important topics as it comes to a periodic paystub review. With each topic, it is helpful to consider the following; How do each of these factors compare to your financial plan? Is the information correct and aligned with your expectations? 

As part of your paystub analysis, you will want to review and track the following:

  1. Income: Your paystub provides detailed information about your gross income, any bonuses or commissions, and any taxable benefits you received. As part of your mid-year tax planning, you will want to compare this year’s income with previous years to spot any significant changes. Changes in income are an important “tipping point” for knowing when taking certain actions might improve your future tax situation. Your paystub will be vital in projecting out your income.

  2. Withholdings: Your paystub will include details about the taxes withheld from your paycheck, such as federal income tax, state income tax, Social Security and Medicare taxes. Use the information on your paystub to compare it with your tax obligation. Reviewing your paystub allows you to verify that the correct amounts are being withheld based on your tax situation for the year.

    If you find adjustments are needed to your withholdings, you can submit a new Form W-4 to your employer.

  3. Deductions and Credits: Your paystub will also reflect deductions and credits that will affect your taxes, such as contributions to retirement plans, health savings accounts (HSAs), or flexible spending accounts (FSAs). You will want to keep records of these deductions, as they can reduce your taxable income and potentially your overall tax liability.

    This can also serve as a checkpoint with your savings. Could you be contributing more to your retirement plan? Are you taking advantage of your full employer match (if available)?

  4. Pre-Tax and After-Tax Deductions: Some deductions, such as contributions to a traditional 401(k), are taken pre-tax. This means that the contribution will reduce your taxable income. On the other hand, some contributions, like a Roth 401(k) contribution or post-tax deductions, are not tax deductible. Understanding the nature of your deductions helps you accurately report them on your tax return and avoid potential errors.

    It is also important to strategize between pre-tax vs. after-tax deductions. Which option makes the most sense for you and your unique tax situation? 

Overall, the paystub is not just a mere piece of paper, but an important tool for financial awareness. By taking the time to review your paystub, you will arm yourself with knowledge to protect against errors, discrepancies, or missed opportunities. 

We get it – taxes can be complex. Working with a financial advisor can allow you to be proactive and help you identify potential savings opportunities. Contact us to get started.