Are you wondering what is a pay stub and how to create one for your business? Read our detailed guide on the key components to understand.
More than 80 million workers across the United States have experienced errors in their paychecks.
After putting in sweat, blood, and tears, missing out on your rightful earnings due to an error in the payment can be serious. For employers, paying under or over the rightful amount can have significant implications. Thus, both workers and employers need to make checking and storing pay stubs a habit.
If you’re wondering, “What is a pay stub?” Here’s a guide to help you better understand this useful document.
Table of Contents
What Is a Pay Stub?
A pay stub, also known as a paycheck stub, is that section of the paycheck that outlines details concerning the employee’s salary.
A pay stub will break down the wages an employee earns per pay period and the year-to-date payroll. Along with the itemization, it also outlines any taxes and deductions taken out of an employee’s earnings. Additionally, it indicates the net pay an employee will receive.
Pay stubs can be physical or electronic. For the former, it is typically attached to a physical check using a perforated edge.
With electronic versions, you feed information into pay stub generator software and receive an email with the digital version. Usually, the software will have a sample pay stub that helps you figure out the content on your electronic slip. Online payroll systems can also generate digital pay stubs.
What Do You Need a Pay Stub for as an Employer?
To be clear, there isn’t any deferral law that requires an employer to provide pay stubs. With that said, many states do place requirements on employers.
In case of any pay-related issue with an employee, a pay stub can offer critical reference to help settle such matters. Additionally, when tax season rolls around, you can use your employees’ tax stubs to fill out their Form W-2.
What Can You Use a Pay Stub for as an Employee?
For employed folk, a pay stub can be useful in various circumstances when managing personal finances. These include:
1. Filing Taxes
When you don’t keep track of your pay stubs, you’ll find yourself backtracking through your paychecks to figure out your income tax. When you have them, it cuts down the time needed to compile the information to file your taxes.
Furthermore, if you have work-related expenses that need expensing, you can accurately track that information.
2. Renting Property
Some rental management agencies and landlords will ask you for employee evidence and proof of address. Having pay stubs over a long employment period shows that you have an income, but you’re a reliable tenant.
3. Proof of Employment
It’s not only future landlords or their agents that will ask you for proof of income. Other applications such as auto and bank loan credit applications will require you to show you’re gainfully employed. Even specific visa applications need you to prove you attain a required income threshold.
Having pay stubs on hand helps you offer irrefutable proof of where you work and what you earn. That becomes doubly useful when such critical inquiries come when you least expect them.
4. Compensation
If you are eligible for compensation due to extraneous circumstances, pay stubs offer valid information necessary to determine the compensation due to you.
For example, if you are involved in an accident that puts you out of commission, you stand a chance of being compensated. However, the amount you’re set to receive isn’t arbitrary but instead tied to your current and future earnings.
Your pay stubs will act as documented proof of what you’ve made in the past and how much you’ll be losing in the future. That’s critical information that directly influences the level of compensation you receive.
Core Elements of a Pay Stub
For standardization, pay stubs have several core features that must be present to help give better information. These key components are the gross pay, taxes, and other deductions and the net pay.
1. Gross Pay
Gross pay is the total amount the employee is receiving from their employer before any deductions are made. Gross pay is divided into two columns to reflect the current and year-to-date gross pay.
Since the pay stub also features the number of hours an employee has worked, they are also divided into two similar columns. That’s to show the current number of hours world versus the year-to-date number of work hours.
The pay rate is also part of the pay stub information. How the pay rate is recorded depends on the nature of the employment in question. Gross pay will then include regular income earned on top of any extra earnings.
2. Taxes, Deductions, and Contributions
Employees won’t take home their gross pay as the employer will need to deduct taxes and other contributions first. A pay stub is critical in giving employees visibility into what gets deducted and at how much.
Similar to gross pay, taxes, and deductions are also split into two categories to reflect the current and year-to-date figures.
Some of the more common taxes employees find on their pay stubs include federal income tax and the employee contribution to FICA tax. In some instances, there might be additional local and state taxes.
Other deductions and contributions an employee makes subtracted from gross pay are also itemized. These can include retirement plan payments, insurance premiums, and other voluntary contributions.
There are items you’ll find on your employee pay stub that aren’t deducted from your gross pay since they indicate the employer’s contributions. For example, SUTA tax, the employer’s part of FICA tax, among others may be shown for comprehensive information.
3. Net Pay
The net pay is what you will take home as an employee once all the taxes, contributions, and deductions are subtracted from your gross pay. Your paycheck documentation will detail the current net pay and the year-to-date net pay as well.
Understand Your Pay Stub Information
Getting paid the wrong amount or paying inaccurately can strain relationships and have negative consequences for both employers and employees. To avoid costly inaccuracies, take the time to ask yourself, “What is a pay stub?” to help you understand the importance of this crucial document.
Learning how to accurately pay your staff is only one element of running a successful business. Our blog helps you understand the ins and outs of flawless business operations. Check out more of our content today to grow your skills as a business owner.
