Why Do Companies Provide Pay Stubs?
We can divide the relevance of wage statements into two categories: how these documents help employers and why workers find them useful.
Employers use pay stubs to deal with any tax issues that may arise. Companies often reference pay stubs for tax purposes, and they especially do so when disputes with employees occur. For example, if a worker claims they were underpaid, the employer’s first action is to reference the employee’s past pay slips to see if the claim is valid. Employers find pay stubs useful in today’s business world because these slips provide a clear, working record of their financial dealings with employees.
On the other hand, workers find pay slips helpful and relevant for similar yet slightly different reasons. First, employees must keep a record of their earnings in case there is a problem. Keeping track of earnings also helps workers adjust their hours and incomes and correctly budget their time and money.
Another way that payment slips help employees is through their taxes. Many workers struggle to understand the complicated process of filling out state and federal taxes each year, but keeping a clear track record of company payments makes it easier to understand where all the money goes and how much they may save or receive in the form of a rebate or refund.
Employee paychecks also help workers provide proof of income when buying a house or applying for a loan. Workers can also use play slips to show proof of employment, and these stubs are useful for applying for credit cards, bank accounts, rental apartments, student loans, and more.
Pay stubs play an important role in the accounting process for workers and their companies. Therefore, we encourage employers to make it simple for workers to view their pay slips, even if the state does not require them.
What Information Goes On A Pay Stub?
Pay stubs contain a wealth of vital information, especially for a small slip of paper. The financial information paychecks contain part of what makes them essential for employees and employers.
The format of different pay slips differs, but we can count on the following information being included on the slip:
- The individual worker’s personal information: name, social security number, phone number, and permanent residence
- The company’s pertinent information: company name, address, phone number
- The relevant dates of the current pay period
- The worker’s gross earnings, meaning the amount their employer pays them before subtracting worker contributions, taxes, and other deductions. This earning amount is not the amount the worker “takes home.”
- Net pay, or the total payment number the worker “takes home” in their payment
- The amount of withheld taxes
- State and local tax amount that is taken out
- FICA taxes the worker pays
- The worker’s contributions to retirement, pension plans, or other types of plans
- Additional deductions for insurance, depending on the coverage the worker has
All of the information pay slips contain is important. However, here are the most vital aspects of paystubs for employees:
What is Gross Pay?
Gross pay is the amount workers earn before employers and agencies withhold taxes and other payroll deductions, such as benefits, from their paychecks. Therefore, many consider gross pay the “total” amount of the paycheck, although workers do not see the entire amount.
Many sum up gross pay as the wages employees earn before deductions. Many small business owners use “gross pay” when reviewing compensation figures with new employees. Often, if an employer tells a prospective employer they will earn $75,000 during their first year, they mean gross pay. But, realistically, the worker would earn less than $75,000 because of the necessary deductions.
Another place we see the gross pay concept utilized is on state and federal tax forms. Many workers find it useful to view their gross pay for the quarter or the year and then make sure they complete all deductions properly and don’t lose any money.
What is Net Pay?
Net pay is the amount workers receive after subtracting withholdings. We also call net pay “take-home pay” since it is the amount employees can deposit or spend.
Net pay numbers depend on the number of payroll deductions. Some deductions are voluntary. For example, some workers elect to pay X towards retirement. However, some deductions, such as taxes, are obligatory.
What Deductions Do Pay Stubs Include?
Paychecks normally feature deductions in the form of tax payments and other contributions. All workers must be appraised of their deductions and should check the numbers each month or each time they receive payment.
What Taxes Do Pay Stubs Include?
Pay stubs include:
- Medicare taxes
- Social Security taxes
- Withholding amounts from state income taxes
- Withholding amounts from federal income taxes
What Contributions Do Pay Stubs Include?
The nature of worker contributions typically depends on the job and the benefits the employer offers. For example, contributions may include insurance, retirement, and other savings plans.
What Legally Needs to be on a Pay Stub?
In the US, no federal laws exist to force companies to give out pay slips. However, many states enforce the use of pay stubs, so all workers and employers should prepare to do so. Plus, pay slips are extremely useful for various reasons, so why not utilize them at one’s company?
Additionally, different states fall under different categories in terms of pay slips. Some states have no rules, so no pay stub actions are necessary.
Some states are designated “Access States.” This designation means that workers in the state must receive pay stubs via the web or on paper.
Some states are “opt-in states,” meaning that companies must offer pay stubs, but workers can refuse them.
Some states are the opposite. These “opt-out” states require businesses to get workers’ approval before changing pay slip actions. In “opt-out” states, workers have more freedom to handle pay slips.
Unsure what your state’s policy is? Check the Department of Labor website for all the information you need regarding paycheck regulations.
Are Employees Required to Keep Copies of Pay Stubs?
Many professionals think they should hold onto their pay stubs for one year, and then they can get rid of them.
However, we suggest keeping worker pay slips and payment records for a minimum of 3-4 years. Since the IRS asks workers to maintain their records for at least four years, this figure keeps individuals safe in case, for example, the IRS audits them.
In fact, the Age Discrimination in Employment Act and the Fair Labor Standards Act both request that workers keep their records for four years, and the EEOC specifies that they should hold onto their work records for a year, at least.
While employees must maintain their records, employers must also keep records of past dealings with employees. Again, we recommend a reliable payroll provider or excellent payroll software for assistance.
Lastly, employees should not destroy their pay stubs until they get their annual W-2 forms. Workers also need to use pay slips to fill out taxes since they provide relevant information.
Why Contact Nakase Wade?
At Nakase Wade, our California lawyers and corporate attorney are experienced, skilled, and ready to answer your questions. Our goal is to help business owners continue to strive in today’s competitive corporate world, so if you need legal representation, contact us today.