A year ago, Allison leapt from working a desk job to becoming a business owner, opening her own bakery in Tempe. Business took off, and she now needs to hire two full-time employees. Unfortunately, Allison has no idea how to go about paying her employees correctly. She does not have access to a stub generator and She doesn’t know what type of information she should include on a pay stub.
Allison’s story is one that’s all too familiar for small business owners. If you’re like Allison, you’ll need to learn how to convert your employee’s hourly rate into a paycheck stub. Below, you’ll find a complete guide to issuing pay stubs — so that you can get them right the first time.
What is a pay stub?
Just as the paycheck has evolved over the last 50 years, so has the pay stub. The name “paycheck stub” once had a quite literal meaning: It was the receipt that remained after detaching your paycheck.
Now, more and more employers use direct deposits to insert funds into their employee’s accounts, causing pay stubs to become electronic. Employees no longer have a physical pay stub to hold in their hand every pay period — just a balance in their bank account.
So, what’s a pay stub in today’s digital world? A pay stub is a record of the 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.
Components of a pay stub
A pay stub should give employees information about the money they’ve earned for the most recent pay period and illustrate how much they’ve made for the year. Amounts are typically listed two ways on a pay stub: per pay period (usually weekly, bi-weekly, or monthly) and year-to-date (cumulative).
Pay stubs will also typically list other categories as well, usually money withheld from the gross pay. Employers often withhold funds for federal, state, and local taxes, health insurance, and Social Security, among others. 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 that you’ll find on a pay stub.
- Gross Wages: Maybe the most essential part of payment stubs is a listing of the wages. Gross wages are the amount that the employee earned before tax deductions and other withholdings.
- Hours Worked: You should 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 pay stub should list the amount of money the employee has paid toward their federal taxes and state taxes. Tax deductions are mandatory, although an employee can opt for additional withholdings. An employee would indicate this when completing his or her IRS Form W-4.
- Deductions: Besides taxes, the employee may also contribute a percentage of their gross wages to health insurance or a Flexible Spending Account. Unlike taxes, these are voluntary deductions that the employee has elected to have taken from their gross pay.
- Employer Contributions: As an employer, you make specific contributions on behalf of your employee. These elections may include the employer portion of the FICA tax or contributions to 401(k) or retirement accounts. Many employers offer to match a percentage of their employees’ contributions to their retirement plans. So 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 the 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 does not 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 have been listed, there should be a line item for net pay. This is the amount of the paycheck or direct deposit that the employee “takes home” after all deductions, contributions, and taxes.
- Additional components of employee paycheck 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 Social Security number or bank account number.
Why pay stubs are important
As payroll processes become more and more automated, you may wonder why a pay stub is even necessary anymore. 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 the money you promised. It also helps demonstrate that you have deducted the required taxes and fees. Additionally, in the case that you fire an employee or that one quits, you may need to issue them a final paycheck quickly. Having an accurate, ongoing record of their wages and deductions will make it easier to determine what you owe them.
Adding employees is a welcome sign of success for your small business, but it does come with some new responsibilities. By ensuring that you track, and report, the elements of the pay stub you can:
- Maintain accurate accounts
- Pay your employees correctly
- Manage federal and state deductions
The more precise your record keeping, the better equipped you’ll be to avoid any unwelcome surprises.
Issuing a pay stub
With more and more businesses and employees electing for direct deposit, pay stubs have migrated to online systems. Today’s online systems make payroll services more effortless than ever. If you’re using a program like QuickBooks, most pay stubs are auto-generated with the data already available in the system. Small business owners find that they can run payroll with the click of a button.
QuickBooks Payroll also makes it easy for you to generate a pay stub for an employee’s records. And your employees can log in to an online portal where they can access their pay stubs.
Online payroll software makes things easier for both the employer and the employee come tax season. The online systems will automatically generate IRS Form W-2s for annual tax submission. Employees need a Form W-2 to file their taxes at the end of the year.
Gone are the days when a pay stub came attached to a physical check. If you’re looking to streamline your payroll methods, be sure to look into using online software. Doing so will make things more convenient for both the employer and the employee.