Hi folks, in this Blog we're going to talk about pay stubs. What they are and what information needs to be in them. Now let's dive right in, into everything you need to know about these pay stubs. Pay stubs show details about each of the employee’s paychecks for each period. They typically accompany physical paychecks.
However, most employers offer direct deposits and they make these pay stubs available electronically to make the paycheck process paperless.
Pay stubs are particularly important because they keep employees informed. They also help employees get a clear picture of their wages, deductions, and a net paycheck, which is the cash that they receive. Pay stubs are required by federal law, but most states legally require employers to give employees pay stubs or equivalent information in a timely fashion. Check with your state for details about that.
Now let's talk about what actual information we're expecting to see in a typical pay stub.
1. First, we're going to see employee details: name, address, that sort of thing.
2. Then you're going to see the dates covered in the pay period for that paycheck date.
3. the actual date of the paycheck.
4. You're going to see information such as gross wages or salaries, which could include hours worked and pay rate if they're hourly employees.
5. You're going to see tax-related and non-tax-related deductions.
6. finally, you're going to see other non-taxable additions such as expense reimbursement.
Now let's take a look at these terms in more detail.
Gross wages are the full amount an employer pays before deductions are made. Gross wages could be a fixed salary, an hourly rate, overtime, bonuses, vacation or sick pay, et cetera. All these forms of compensation are generally subject to tax.
The next one is deductions, which are the cash amounts taken from the employee's gross wages. Some deductions are considered to be pre-tax, which means they reduce the number of taxable wages.
A 401k is a great example of this. An employee can contribute to their retirement plan and reduce their taxable wages. They will save on taxes immediately, but also render a smaller check with this deduction. There are special tax rules that set the limits to how much an employee can contribute to their employee plan on an annual basis.
Next, there are taxes to be deducted. Usually, they include FICA taxes that go towards funding Medicare and Social Security, as well as federal and state income tax withholding, which employees eventually reconcile at year-end with their tax return.
Other deductions are considered to be after-tax, which means they reduce the total amount of the net paycheck without affecting the taxable wages, or the actual taxes being paid.
An employee paying back a previously non-tax loan from the employer is a great example of this. In some cases, you will see after-tax additions to the net pay, such as a non-taxable reimbursement. That could be incurred by the employee during a pay period, such as an office supply or a travel expense.
Another example of this could be a parking fee associated with a business meeting. Net pay is the amount remaining after all deductions have been accounted for, and this is the amount the employee usually receives in cash. The pay stub helps reconcile the employee's gross wages with their actual net take-home pay.
You will also notice that most pay stubs represent these numbers in two forms:
● One for the current pay period related to that specific paycheck.
● And the other the commutative amount for the entire year-to-date.
Essentially the last pay stub of the year will contain the same amount of information that will be ultimately reported to the IRS and state in the W-2 Form. Now let's take a look at a couple of pay stub examples.
The first one is a simple example of a business that doesn't offer many benefits. it includes employee details, dates covered, gross wages, hours worked, rates paid, deductions, and ultimately the net wages.
Here's another example of a larger deduction section that might accompany a more extensive benefits package. As an employer, you should keep an archived copy of these pay stubs for at least four years, because of IRS requirements.
A number of other federal regulations require information to be archived as well, beyond what's captured on the pay stub, such as timesheet data, original hiring forms, and any relevant tax information provided by employees. If you use bookkeeping software such as QuickBooks for your accounting and QuickBooks Payroll, most of these records are kept in these systems for future reference.
I want to leave you with some best practices when it comes to pay stubs.
1 First, make sure your employees can access their pay stubs on-demand, as required by the laws in your state. Sometimes this means printed paper copies, but ideally, you would provide access electronically through a payroll portal.
2 Second, all the pay stub details we discussed in this video, such as employee details, dates covered, gross wages, hours worked, rates paid, deductions, after-tax reimbursements, and net wages need to be clearly displayed in the pay stub and easily understood by the employee. If the employee uses direct deposit, make sure to include that information as well.
Pay stubs, or any historical wage information for that matter, are often required at stressful moments, like applying for a loan, or filling out a rental application. Employers can reduce that stress by removing any unnecessary barriers and making the pay stubs available on demand. That's it for this discussion about pay stubs. If you want more information, contact our advisor for free.