When you’re running a business, you need to track where your money goes. And that includes every paycheck you give employees.
Luckily, pay stubs record how much workers get paid. They help staff understand the details of their pay, including the employer’s deductions. And they give employers a record of their payroll.
Here’s a breakdown of what a pay stub is and why they’re important for both employers and employees.
What Is a Pay Stub?
Employers give workers pay stubs with their paychecks. Also known as wage or pay statements, they show the total amount the company paid the worker. They also explain what the payment is for and detail deductions from the earned wages.
Pay stubs are essential for many reasons. Workers benefit from knowing why they’re paid a certain amount. They can see why they didn’t keep 100% of their earnings, like healthcare or tax deductions made by the employer. It’s also helpful for their tax records because they know their net income.
Employers also benefit from having a written record of how much they paid employees. This is helpful in several scenarios:
- Paying Employees Fairly. If you have staff who deserve or request a raise, having access to their pay history helps you decide if you’ll increase their wage or salary.
- Working With Contractors. Tracking the costs involved in projects makes pricing subcontract work easier. If contractors ask for a deposit for future work, showing past pay stubs proves how much they were paid for similar tasks to help you agree on a rate.
- Paying Taxes. Making sure that payroll taxes are deducted properly is crucial for legal compliance. Pay stubs outline how much was withheld for taxes, which can be helpful when filing or trying to correct an error.
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What Are Pay Stubs Used For?
Knowing the definition of a pay stub is just part of the equation. You’ll also need to know what pay stubs are used for. Here are some common uses:
- Pay Stubs Explain a Paycheck. Workers may be confused about why employers paid a certain amount since it’s less than their gross pay. The information on the wage statement should clear up the confusion by showing where the money went.
- They Serve as Proof of Payment. If an employee claims they weren’t paid for all their work, an employer can check the pay stub. It should prove what compensation they provided and for which dates.
- They Serve as Proof of Income. Employees may sometimes need to prove what they earned. For example, someone applying for a loan may need to show a lender their earnings. A pay stub provides that documentation.
What Information Is on a Pay Stub?
Employee pay stubs should contain lots of information. Here’s what to include when issuing one.
Contact Details
Wage statements accompanying a paycheck should have the employer’s name and the worker’s name. They should also have both the business and employee’s addresses. This way, there’s clarity over who was paying and who received the funds.
In some states, companies also must include their employer identification number (EIN).
Dates
The document should also specify the dates of the pay period. Tracking what period the business paid a worker for helps avoid missed payments or overpayments, and everyone knows exactly what the worker was compensated for.
If employees are paid bimonthly, for example, they will receive their pay and pay stub on the 15th and the last day of each month.
Pay Rates and Hours
The pay stub should show hours worked at different pay rates. The different rates could include the following.
- Standard. This is the normal amount employers pay workers for a 40-hour week.
- Overtime. Employers pay overtime once an employee has worked more than a certain number of hours (usually 40). Overtime is usually 1.5 times the worker’s normal rate.
- Double time. Only California requires double-time pay (under specific circumstances). Some employers voluntarily offer it to try to get workers to work long hours or take undesirable shifts. It’s double the normal rate.
When employers list the hours worked at different rates, it’s easier to calculate how much total money the employee should earn. If a worker earning $10 an hour worked 40 hours and had 10 hours of overtime, they’d be paid $400 for the first 40 hours. They would earn an extra $150 for the last 10 at $15 per hour.
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Gross Earnings
Gross pay is the total amount the employee earned that pay period. This is the amount due before taxes or other withdrawals. In the above example, the worker made $550 before deductions.
Benefit Deductions
Employees sometimes choose to have money taken out of their checks. They can opt to use this money to pay for workplace benefits. For example, a worker might have 401(k) contributions deducted. They might also have union dues or health insurance premiums taken out.
The pay statement should show the money withdrawn for benefits. Workers and employers can both refer to this information if they have questions about what benefits employees paid for.
Employee Taxes
Employees owe taxes to the IRS and sometimes their state. They also have to pay taxes under the Federal Insurance Contribution Act (FICA). FICA taxes pay for Social Security and Medicare.
Companies must deduct taxes from a worker’s paycheck before making payment. Because it’s important for both workers and businesses to know how much tax was collected, employers list taxes as a line item on these documents.
Employer Taxes and Contributions
Employers pay half of the FICA taxes workers owe. Sometimes, employers also contribute to a worker’s 401(k) or subsidize health insurance premiums. Employers should detail any of these contributions or taxes withheld on the worker’s wage statement. These are valuable benefits, so keeping a record is important to understand the employee’s total compensation.
Garnishments
Courts sometimes order garnishment. This means employers must withhold money from a worker’s paycheck. Courts can order someone’s wages garnished for many reasons. Unpaid child support or unpaid taxes are common causes.
Employers should specify how much they withdrew due to a garnishment order. This shows the company is complying with the court’s requirements, and the worker knows why they weren’t paid that money.
Paid Time Off (PTO)
Workers sometimes earn sick or vacation time. Pay stubs usually show the time off that a worker has earned so far, which is helpful for tracking purposes. Workers also know how much time they have accrued. They can schedule vacations or personal days with ease.
Net Pay
Net pay is the actual take-home pay for the employee. It’s the amount they get when they cash the check or the company directly deposits their funds, after all taxes and deductions.
4 Tips to Create a Pay Stub and Mistakes to Avoid
Companies need to avoid making mistakes when creating check stubs. Accurate stubs ensure legal compliance and help build a transparent culture with employees. To avoid mistakes, follow these best practices.
Know all State and Local Requirements
Throughout the U.S., there are rules regarding pay stubs. Many states require companies to provide them, either in printed form or electronically. Employers can check with the Department of Labor to determine their area’s specific requirements.
Include the Necessary Information
A pay stub must be complete. It should include all the details about the work performed, money owed, and funds withdrawn from the check. Otherwise, it doesn’t serve its purpose of showing total employee compensation, demonstrating the work an employer paid for, or showing where the funds went.
Make Pay Stubs Easy to Access
Pay statements should be accessible. Offering digital copies is helpful. Workers can easily find them and refer back to them when necessary. Of course, some employees prefer printed statements. Those documents can be kept with other financial records. Companies may offer a choice between digital and printed stubs to best accommodate staff members.
Work with a Payroll Service Provider
Many companies want to avoid handling payroll on their own. A payroll service provider issues payments and generates pay stubs for you. Companies should contact several potential payroll providers for quotes and wait for them to follow up with an estimate before making a choice.
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Make Collecting Payments the Easiest, Most Efficient Part of Your Business
Writing detailed pay stubs is crucial to keeping your financial records accurate. But so is accurate invoicing.
With Joist, your clients can save time by paying directly from your invoices. We’ve made it simple to accept payments by credit card, PayPal, or Venmo from your clients to streamline invoicing for everyone involved.