You should know how to read your pay stub to track your employee's taxes and deductions. From an employee's point of view, reading paystubs is equally important. It helps them understand why they receive a certain paycheck amount.
This article will help you understand check stubs in every entry. So let's dive in.
About Pay Stub
A pay stub is a monetary record for your employees to track their salary or wages with their pay periods. They also get a record of their deductions and save the pay stub as an official record.
According to the Fair Labor Standards Act (FLSA), employers are not required to issue employee checks or pay stubs. However, you must have an accurate record of the salary or wages paid to the employees according to their pay period.
The pay stub is also known as an earning statement, pay slip, paycheck, or simply stub. When you pay your employees with the paycheck, a pay stub is perforated to the check. In the case of an online deposit, your employees will get the amount, and they can get the pay stub from the company’s payroll system.
So, providing a pay stub informs employees of their payroll taxes and net pay. However, many employees don’t know what is being deducted from their gross earnings or income as a tax deduction.
The pay stub is also official proof of income if an employee does the following:
- Opens a bank account
- Asks for a loan from the bank
- Invests in housing or funds
Sections in a Pay Stub
A pay stub usually has the following sections:
This section has the employee’s name, address, bank details, and identity or social security number. The employee’s details must be accurate. Otherwise, they might face legal action for providing a false income statement.
You must enter your company’s name and address before the pay stub’s date. You can also add more details, like the industry you are working in.
The pay period is a cycle that companies follow to pay salaries and make other transactions. Companies follow different pay periods because there’s no standard for making such transactions. However, according to the US Bureau of Labor Statistics, a bi-weekly pay period is the most common.
Ensure that you accurately mention the pay period, so your employees will know how much they are paid compared to their working hours. A pay stub is also issued at the end of every pay period to smoothly manage the payroll system.
Pay Rate and Hours
Some employees work hourly, while some get salaries on a specific pay period. So, you must calculate the pay rate for all employees, especially those who get their paychecks according to their working hours (hourly employees).
The pay rate should also be mentioned on the pay stub. The pay rate section also includes overtime and the pay rate for working additional hours.
Gross Income or Wages
Gross income, pay, or wages are what employees get before any deductions. The gross income also displays the employee benefits like:
- Health savings account
- Travel allowance
- Paid leaves
The gross earnings are written separately from the net pay to make the pay stub understandable.
Payroll deductions are sums taken from an employee's paycheck to cover benefits, garnishments, and taxes. The difference between gross and net compensation is made up of these withholdings.
Every pay month, payroll deductions are typically conducted based on the relevant tax legislation, withholding data provided by your workers, or court order.
Federal Insurance Contributions Act (FICA)
The FICA law of 1935 states that employees will contribute to Social Security and Medicare schemes from their earnings. These programs benefit the community by giving disabled, orphans, or unemployed people financial aid or support.
FICA also determines that employees who pay this tax will get the benefit later. You can consider it as a retirement bonus or disability fund.
The FICA tax is separate for employers and employees, which means you will find separate entries on the pay stub. The Social Security tax on wages is 6.2%, while the Medicare tax is 1.62% for both the employer and the employee.
If you are self-employed, you must pay the full amount of tax being an employer and an employee, i.e., 15.3% of the total earnings.
Every employee in the US goes through withholding taxes. These taxes are deducted from the gross pay depending on several factors, like:
- Annual income
- Family members
The withholding tax determines that the employees don’t pile up a load of liabilities at the end of the year. It also fights corruption against non-filers.
While paying their employees' salaries, employers clearly mention the tax deductions on the pay stub. You can find the difference between the gross income and the net pay and calculate how many deductions occurred in the pay stub.
Following are the withholdings that make a difference in the gross income and net pay:
- Federal income tax
- 401(k) contributions
- Wage garnishments
- Child support payments
- Local taxes
Remember that federal and state taxes issue a unique ID to the employer against every employee's paycheck.
Pre-tax deductions are deductions from an employee's wages before taxes are deducted. Pre-tax deductions lower taxable income and the amount owing to the government since they are deducted from gross salary for taxation purposes.
Pre-tax deductions may be made for health insurance, group term life insurance, and retirement programs. Although it's not mandatory, it's often in the best interests of the workers to participate. Compared to what they would have to pay for benefits and other services post-tax, pre-tax donations may result in significant financial savings.
However, the savings are limited. The maximum pre-tax contribution that workers are permitted to make is often capped. For instance, the IRS controls the annual maximum that may be contributed pre-tax to a 401(k) retirement plan.
After all statutory taxes have been withheld, post-tax deductions are deducted from an employee's paycheck. Post-tax deductions do not reduce the individual's overall tax burden because they reduce net pay rather than gross pay.
Roth IRA retirement plans, disability insurance, union dues, charitable contributions, and wage garnishments are all common instances. Employees may opt-out of all post-tax deductions except wage garnishments.
Employers may use the cost reimbursement procedure to refund workers who have spent money on business-related items. Simply put, it is any money owed to you by your employer. Employees who get cost reimbursements are not obliged to declare such payments as salaries or income.
The net pay is the final amount paid to the employee after all deductions.
Making Sense of the Check Stubs or Pay Stubs
First, start with the employer’s and employee’s details. These details are critical because if you find any error in the pay stub, the same error is forwarded to the banking and government sector.
The next thing is the employee ID with the pay rate and type. The employee ID is a unique number provided by the employer. The pay type must be mentioned clearly, as it’s the foundation of the pay stubs.
The next part is the pay stub date and payment period. Remember that your employee can ask you to issue them the pay stub anytime. That’s why you must mention the pay stub, which is the date the statement was issued.
Similarly, you must mention the payment period on the pay stub as required by the employee.
How To Read the Codes on Pay Stubs?
While reading the pay stub, you will find short forms or codes which don't make sense. But every code in the pay stub is important, and you must know what it means. Here are some common codes on pay stubs and their meanings:
- FED TAX - Federal income taxes withheld (income)
- MEDICARE - Tax on Medicare (under the FICA law)
- SS or SSWT - Tax for social security (tax withheld)
- STATE TX - State income tax
- ERA - Contributions for the Educational Retirement Act
- LIFE - Life insurance (optional)
- FICA - Social Security and Medicare
- INS/MED - Savings for insurance and medical
- GROSS - Income before deductions
- YTD - Year-to-date
The pay stubs you generate might use these codes without their full forms. But you can manually write clear titles on the pay stub instead of using codes for clarity. That will help your employees easily understand the pay stub.
How do you read a pay stub abbreviation?
These are about your usual wages or revenue. Not all organizations utilize them, but here's an example of how some paychecks use this kind of shorthand to communicate income information.
- SLRY - Salary. The amount you earn for a given pay period.
- HR - Hourly. Your hourly wages.
- HRS - Hours. Your total work hours in a pay period.
- REG - Regular Pay. Standard earnings for work performed in an exact pay period.
- OT - Overtime Pay.
- SI - Supplemental Income.
- PTO - Paid Time Off.
How Long Should You Keep a Pay Stub?
The W-2 form is a financial document that records how much you have paid your employees. This document also includes how much taxes you withheld from them.
The tax section includes all the withholdings you have already deducted from the employee's earnings. Remember that you might not find the 401(k) contribution or health insurance in the tax section. That's because these saving options are not mandatory or enacted by the federal government.
The check details section will show the total net pay after the deductions, including withholdings and non-withholdings. Finally, the last two parts have the employer’s taxes and deductions details as proof that the company regularly pays the required taxes.
What Are Pay or Check Stub Readers?
As many pay stub generators are available, you can find similar tools to read these financial documents. Although it’s not necessary to use a tool to read pay stubs, you should consider giving training to your employees on how to read a pay stub.
Can You Use Last Pay Stub to File Taxes?
Yes. You can use the last pay stub to file taxes, but that’s not the best approach. The last pay stub might be missing information, and it’s also an incomplete document. The last pay stub will also give inaccurate calculations because you calculate gross pay, net pay, and taxes before the year ends.
Final thoughts on Understanding Your Pay Stub
Pay stubs include the employee’s income history with the withholding taxes and deductions. Unfortunately, many employees are unaware of the taxes and are confused about why they are not getting the full payment.
The pay stub answers such queries by showing the taxes and deductions separately. When you read a pay stub, start with the top information. Then, make sure the names written on the pay stub are correct.
Then analyze the gross income and the net pay. The difference between the two is the withholdings and other deductions from the employee’s salary or wages. When you understand the pay stub, you can make better financial decisions.