In the last month, two of my clients have looked at their paystubs and realized that their 401(k) contributions were going into Roth instead of pre-tax. This wouldn’t be a problem except for the fact that both of these clients had, months earlier, changed their 401(k) contributions away from Roth and into pre-tax. And somehow it didn’t “take.” This caused an administrative pain in the butt and higher-than-planned taxes.
I have to admit that this surprised me. But what really made my jaw drop was learning the reason the change on the 401(k) website didn’t take: the “integration” between the 401(k) website (where my clients made their changes) and the payroll service (which controls what is debited from their paychecks) is… WAIT FOR IT… an email sent from the 401(k) system to the HR person, who then has to manually key in the change to the payroll system.
Now, maybe I should have known of this possibility before. But I didn’t. Now you may learn from my (clients’) pain. A chain is only as strong as its weakest link, as you’ve likely heard, and an email-plus-manual-data-entry integration for your 401(k) is definitely a weak link.
Both of these clients work for startups, not the Googles or Amazons of the tech world. Maybe the larger companies have a tighter set up. I sure hope they do.
In another story, a client at a startup was being paid half his salary for the first few months, for some convoluted reason. Seeing as how his paycheck was auto-deposited in his bank account (as presumably yours is, too), he didn’t notice.
Until, that is, a few months in, when his paycheck was suddenly twice as big. Whoo! The HR person explained, at that point, what had happened, and the client eventually got all his back pay. But that could have caused some unfixable problems: your 401(k) contributions could be lower than you intended for a particular calendar year, your bank account could run dangerously low and payments out of it could bounce, etc.
Please “Trust but Verify” Your Paystub
So, what might you find when you double-check your paystub?
Note: I’m assuming you get paid twice per month because I multiply by 24 several times.
Your Pay:
- How much did you get paid, gross? This is one of the first numbers on the paystub. Multiply by 24. Does that equal what you think your salary is?
Your 401(k):
Lots of stuff here, reflecting the many variations 401(k) plans can offer.
- How much money is being contributed to your 401(k)? Multiply by 24. Do you get at least $19k (the 2019 401(k) contribution maximum)?
- If not, you won’t maximize your 401(k) this year. Maybe you have a good reason to not max out (they definitely exist), but make sure the choice is intentional.
- If it’s way over $19k, then you’ll max out your 401(k) well before the end of the year, and you might miss out on company match. You’re safe if your company “trues up” the company match at year’s end.
- Is your 401(k) contribution going into Roth or Pre-Tax? Is this what you want?
- If you think you are contributing after-tax money, is that reflected properly?
- Are you getting the right 401(k) match? (Years ago, checking a paystub is how I learned that I’d fallen victim to maxing out my 401(k) too early in the year and so I missed out on some company match.)
Employee Stock Purchase Plans:
- How much is being directed to your Employee Stock Purchase Plan? What percentage of your salary does that represent? Is that what you thought it’d be?
Taxes:
- In paychecks that include bonuses, how much tax was withheld? Bonuses are typically taxed as “supplemental income,” at a tax rate of 22%. But companies have the option of withholding taxes at a rate tailored to your specific circumstances. If they withheld 22% and your top tax rate is way higher than that (and if you’re a married couple both working in tech, your top federal income tax rate could easily get over 30%), you might need to pay estimated taxes.
Employee Benefits:
- How much FSA (either healthcare or Dependent Care) is being withheld? Multiply by 24. Do you get to the amount you designated in your open enrollment? In 2019, the max healthcare FSA is $2700, max Dependent Care is $5000.
- Commute/transit and other pre-tax benefits: How much is being withheld? Does it line up with what you chose in open enrollment?
- How much Paid Time Off have you used? Does that seem right?
When Should You Check Your Paystub?
I would recommend you double check your paystubs at these times:
- The first paystub of the year. All your new employee benefits kick in on January 1. You want to make sure all your open enrollment elections are being treated correctly in your paystub.
- The first paystub after making any significant changes to your deductions. Usually this means 401(k) changes, but also if you change benefits elections because of some “qualifying event” (having a baby, getting married, etc.)
- When you expect to be reimbursed by your company
- When you get a bonus or RSUs vest
What Else Can You Learn From Your Paycheck?
If you’re at all interested in financial nerdery, you can discover how much you’re paying all up in taxes. In California, for example, that’s not just federal and state income tax. It’s also:
- FUTA (Federal Unemployment Tax)
- Social Security tax
- Medicare tax
- CA SDI (State Disability Insurance)
Washington state has its own bewildering variety of payroll deductions, but mostly on the employer side. (Which took me Many Months to finally suss out after becoming an employer myself. My God, bureaucracy run amok!)
You might also be able to see how much your employer is paying for your benefits. When it comes to long-term disability insurance and health insurance, especially, they are paying quite a bit!
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