Payroll 101: What Is A Paystub?
When you pay your employees a wage, you should also provide them documentation about their pay. A paystub is a form of communication between an employer and an employee, and it communicates with full transparency wages earned, taxes paid, and deductions removed. Employers should understand the information on a paystub in order to help explain payroll taxes and possible deductions to their employees. Paystubs provide agency for employees so they can understand their taxes and wages, as well.
Table of Contents
What Is A Paystub?
A paystub is part of an employee paycheck that itemizes employee wages, taxes, and deductions. This document is an important piece of communication between an employer and an employee because it creates transparency about the job worked and the money paid. Currently, only eleven states require a paystub to take the form of a piece of tangible paper, so while it is most often seen as a printed part of a paycheck, the paystub could come in an online form.
The Components of A Paystub
Each paystub has a set of information viewable each time an employee receives a paycheck. This is the information found on each paystub:
- Pay Period Start & End Date: This reflects the dates of the pay period. Salaried workers need to receive the same amount of money each pay period; some companies issue monthly or bi-weekly paychecks and the start and end dates of that time period is noted on the paystub.
- Pay Rate: The wage rate is the rate of pay for this particular employee’s job. This is how much this employee is paid per hour, if hourly, and the hourly equivalent for salaried workers.
- Number Of Hours Worked: This is the place where employers will calculate how many hours an employee worked during that pay period.
- Other Compensation: Did the employee earn overtime? Is their holiday pay the same as their regular rate? Did they earn a bonus? Any other money earned during the pay period is itemized on a paystub. There should be no ambiguity between hours worked, pay rate, and net pay.
- Gross Earnings: Gross earnings are what an employee earns before any taxes or deductions are removed. My sixteen-year-old self had a real moment of clarity upon receiving my first paystub for working at the movie theater. In my youthful exuberance for shoveling popcorn and threading the movies (pre-digital era, my friends), I forgot taxes existed and was crestfallen when I realized my gross pay was not, in fact, what I was taking home. (Where did the word come from? Gross’s etymology comes from Latin, meaning large or massive. As in, this is how large or massive your paycheck could have been before taxes and deductions.)
- Net Pay: This is the paycheck amount that each employee takes home during that pay period. It’s the amount minus taxes and deductions. (And that is what the word means, too. The word ‘net’ means remaining after deductions and it has since the early 1500s. We’ve had words specific to taxes for much longer than that.)
- Year-To-Date Payroll Earnings: This is the amount of money your employee has earned since January 1st until now.
- Withholdings For Federal, State, & Local Taxes: These withholdings correlate to the number of allowances on an employee’s W-2 and are an approximation of what the employee owes in taxes at the federal, state, and local level. (If an employee pays too much, they may receive a refund; too little, and they will owe taxes.) Federal income tax is considered a pay-as-you-go tax, so this tax is collected from paychecks and sent to the IRS regularly. Contractors, however, are responsible for withholding their own taxes.
- FICA Tax Deductions: FICA stands for Federal Insurance Contributions Act and these are mandatory payroll deductions workers pay with each pay period. The money goes to provide services to Social Security and Medicare.
- Deductions For Benefits: There are some benefit deductions that come out of an employee’s paycheck pre-tax. These are often health benefits or 401(K) retirement benefits. However, there are various other benefit deductions an employee may have depending on the employer.
- Employer Benefit Contributions: If an employer also contributes money to benefits, this money is listed on the paystub.
- Wage Garnishments: The government may require an employer to garnish wages. In that case, the employer subtracts any money owed (from required child support or spousal support, owed federal income taxes, defaulted loans) and sends it to the government on the employee’s behalf.
What Does A Paystub Look Like?
In order to walk you through the components, here is an example of a paystub of our favorite neighborhood car washer, Walter White. Each portion is labeled and identified using the key below.
- Business Information: Your company’s business information is needed on a paystub. Name and address of the business location are sufficient.
- Payroll Company Logo: If you have a company run payroll for you (like Gusto or ADP), the logo from that software provider may appear on your printed paystubs. Some payroll software allows you to customize the look of paystubs and some do not. If aesthetics and logos are important to you, look for a program with customizable options.
- Employee Information: Your employee’s name, address, and employee number (or the last four digits of their social security number) go on a paystub. While it is not required, some paystubs also show the number of tax allowances, too.
- Pay Period/Pay Date: For documentation purposes, the paystub should show the pay period (you are paying the employee from what date to what date?) and also include the pay date.
- Hours & Earnings: How many hours did the employee work and how much does that calculate to in gross pay?
- Tax Deductions: Here is where the payroll tax calculations are shown. The income tax is based on your employee’s tax bracket and allowances; your paystub will show both the current deductions and the year-to-date deductions.
- Other Withholdings: If there are any extra withholdings (contributions to medical, dental, or retirement), the paystub will show how much the employee contributed. Some paystubs also show what an employer has contributed to those categories, but it is often an extra (and not required) component of a paystub.
- Payroll Earnings: Finally, the paystub will show the bottom line: How much was earned, how much was deducted, and what is the net pay?
Am I Required To Provide Paystubs?
While there are no Federal laws requiring employers to provide paystubs, that doesn’t mean that there aren’t state employment laws that require employers to provide paper/online access to payment information. The Fair Labor Standards Act (FLSA) states that employers need to keep accurate records of hours and wages, and keep those records for up to three years. A paystub is a fulfillment of that requirement, but no one requires it at the Federal level. However, twenty-six states require an employer to give a paystub and eleven additional states require that paystub document to be in a physical/paper form. It’s important to check with your state to verify legal requirements.
In states that do not require employers to provide a paystub regularly, employees still have the right to access payroll files when asked either in paper or online form. And if the employer doesn’t want to comply, well, fines and lawsuits quickly follow. The reason? The government finds it suspicious if a business cannot or will not offer transparency around their wages, and so should employees. Non-compliance is expensive and unethical. Again: All states vary in their paystub requirements, but all employers must show documentation of payroll if asked.
How To Create A Paystub
There are several ways a small business can create a paystub. The quickest and easiest way is to let a software service do the work for you. If you pay for payroll services, managing and distributing paychecks and paystubs may be one of the program’s features. If the idea of manually calculating wage, tax, and deductions gives you a strong desire to fall back on your go-to procrastination tactics, outsourcing the job may be a better option. Services vary by price and features. Merchant Maverick recommends Gusto for small businesses starting payroll, but if you already use Square systems, Square has a great payroll service that integrates with your POS and time-tracking systems. Do some research to find out what payroll system is right for your company. Check out our reviews of long-standing ADP payroll, Intuit Quickbooks or Paychex.
If you’re not in the market for a full payroll program, you might want to use some free online tools and templates. There are many programs online that offer to create free paystubs and accept information online. Some are subscription-based services and some charge per paystub. There are other free fillable tools a quick search away.
Why should I provide a paystub?
Even if you don’t have to require a paystub legally, a paystub is an important document of trust and transparency between you and your employees.
What information is required on a paystub?
There are no federal requirements for paystubs, but there are requirements at the state level. Please check with someone knowledgable about the paystub laws in your state. In general, if your state requires paystubs, the following information is required: employee information (including an employee ID or social security number), company information, hours worked, wage rate, gross and net pays, federal and state withholdings, and any additional deductions or garnishments.
On a pay stub, what’s the difference between “net pay” and “YTD net pay”?
Net pay shows the amount of money earned on a check after taxes; year-to-date net pay shows all of the money an employee has earned that year after taxes.
On a pay stub, what’s the difference between “gross pay” and “YTD gross pay”?
Gross pay represents the money earned by an employee prior to deductions and withholdings; the gross year-to-date pay shows employees how much money they have earned pre-tax during any given calendar year.
What does FICA stand for on a paystub?
FICA stands for Federal Insurance Contributions Act. These contributions are required by everyone working in the United States; the money goes to Social Security and Medicare. The rates for these contributions are set at the federal level and are adjusted annually for inflation.
What is a paystub penalty?
Penalties vary by state. You can receive a penalty for non-compliance with your state’s paystub requirements, printing incorrect information, or misrepresenting information on a paystub. If this is a company-wide mistake, the penalties are often filed per employee and those fees and penalties get expensive in a hurry. The penalties in most states are also tiered, meaning if you don’t fix your mistakes and you continue to incur fees, those fees will grow exponentially. Again: Check with a payroll expert in your state.
Do you have to print pay stubs for your employees?
Maybe! Depends on your state. There are currently eleven states that require a printed paystub:
- New Mexico
- North Carolina
The majority of states that require paystubs allow online paystubs or printed paystubs. An oft-repeated edict: Check with an expert from your state.
The Bottom Line
Paystubs are not required at the federal level but they may be required at the state level, and regardless of paystub requirements, giving a paystub to your employee is an important aspect of the employer/worker relationship. There are many options out there for creating paystubs, from software programs to free online paystub generators. If you have several employees and do not want to create paystubs by hand every pay period, consider investing in payroll software that does the work for you.
Merchant Maverick recommends Gusto for small businesses looking for an easy-to-use software with amazing features and competitive pricing. However, payroll software is specific and catered to your business needs, so check out other viable options among our other payroll reviews. Square is a great option for employers already using Square products. Older and more established payroll companies include ADP, Intuit Quickbooks, and Paychex.