Last year, Allison quit her desk job and opened a bakery in Tempe. Her small business took off and now she needs to hire 2 full-time employees. There’s one big problem—she doesn’t have access to a pay stub generator and doesn’t know what information to include on a pay stub. If you’re like Allison, you need to learn how to convert your employees’ hourly rate into a pay stub. To do so, follow our how-to guide to issuing pay stubs and make sure you get it right the first time.
What’s a pay stub?Paychecks and pay stubs have changed a lot over the last 50 years. The name “paycheck stub” came about because it was a receipt that remained after detaching your paycheck. But today employers often use direct deposit to insert funds into their employees’ bank accounts. Pay stubs are now electronic.So, what is a pay stub in today’s digital world? A pay stub is a record of an employees’ hours worked, state and federal income taxes paid, and wages earned. Typically, employees can see both the wages they’ve earned that pay period and the amount they’ve made to date.
Pay stub componentsA pay stub shows employees how much they’ve earned for their most recent pay period and/or the year overall. Amounts are typically listed 2 ways—per pay period (usually weekly, bi-weekly, or monthly) and year-to-date (cumulative). Pay stubs also list other categories—usually money withheld from gross pay. Employers often withhold funds for federal, state, and local taxes, health insurance, and Social Security. These categories should all list the amount withheld from the most recent pay period and for the year. In all cases, each of these totals, contributions, or deductions should be listed as its own line item. Below are some of the most common line items you’ll find on a pay stub:
- Gross wages: The most essential part of a pay stub—the amount an employee earned before tax deductions and other withholdings.
- Hours worked: Calculate the number of hours worked by the employee for the specific pay period and year-to-date. This number is straightforward for employees who work 40 hours per week but will likely fluctuate for hourly employees.
- Taxes: The amount of money an employee has paid toward their federal taxes and state taxes. Tax deductions are mandatory, but an employee can opt for additional withholdings. An employee would indicate this when completing their Form W-4.
- Deductions: Besides taxes, an employee can also contribute a percentage of their gross wages to health insurance or a Flexible Spending Account. Unlike taxes, these are voluntary deductions.
- Employer contributions: As an employer, you make specific contributions on behalf of your employee(s). These elections may include the employer portion of the Federal Insurance Contributions Act (FICA) tax or contributions to 401(k) or retirement accounts. Many employers match a percentage of their employees’ contributions to their retirement plans. If an employee elects to donate 3% of their pay to their 401(k), the employer would deposit 3% as well. Because the employer’s 3% doesn’t come from the employee’s paycheck, it’s critical that the employee can see the contributions made on the pay stub.
- Accrued vacation, sick days, or paid time off: If you offer your employees vacation or sick time (sometimes referred to as paid time off or PTO) you should indicate these accruals on a pay stub. Doing so allows employees to quickly reference how much PTO they have left without needing to contact the human resources department. If your small business doesn’t have a human resources department, you’re likely the individual responsible for answering these questions. Providing the information on your employee’s pay stub takes one more thing off your plate.
- Net pay: Once all taxes and other deductions are listed, there should be a line item for net pay. This is the amount of the paycheck or direct deposit that an employee “takes home” after all deductions, contributions, and taxes.
- Additional components of employee pay stubs: Common information such as the employee’s and employer’s names should be included. You should also include the pay period dates and the paycheck issue date. There is no need to include highly sensitive information on a pay stub, such as an employee’s Social Security number or bank account number.
Why are pay stubs important?As payroll processes become more and more automated, you may wonder why a pay stub is necessary. A pay stub is critical because it serves as an official record. Referring to a pay stub is the quickest way to end disputes with either employees or auditors.Accurate payroll record keeping ensures that your company is paying your employees. It also helps demonstrate that you have deducted the required taxes and fees. Additionally, in the case that you fire an employee or someone quits, you may need to quickly issue them a final paycheck. Having an accurate, ongoing record of their wages and deductions will make it easier to determine what you owe.Hiring employees means your small business is booming but it also comes with new responsibilities. If you track and report the elements of a pay stub you can:
- Maintain accurate accounts
- Pay your employees correctly
- Manage federal and state deductions