It’s good bookkeeping to provide a breakdown of your employees’ pay with each paycheck. Employees can verify that their paychecks are correct, and business owners have a record of their workers’ hours and wages.
Overview: What is a pay stub?
Pay stubs tell the story of paychecks. From listing taxes taken out to the number of hours worked, pay stubs show employees how their paychecks are calculated.
Pay stubs traditionally accompany paper paychecks, but in a country where direct deposit reigns, they have become digital documents that live in your business’s payroll software.
The federal government requires you to keep track of your employees’ hours worked and their wages, but many states take it a step further, requiring that pay stubs be available to employees.
Employees use their pay stubs to prove their income when applying for loans. They also provide transparency in the calculation of your employees’ pay, making it easier to catch errors.
It’s also in your best interest as a business owner to generate pay stubs for your employees. When you remit payroll taxes, it’ll be helpful to record the amount you withheld from your employees’ paychecks.
If you do your payroll and need to make pay stubs, we’ll show you what to include.
What should employers put on pay stubs?
A good pay stub provides a snapshot of the employee and his or her earnings for a given pay period. A great pay stub zooms out and provides a status update on the employees’ earnings history.
The basics: name, address, and pay period
Make it easy to identify whose pay stub is whose. Add information like the employee’s address, employee ID number, and partially redacted Social Security number so you won’t get people’s pay stubs confused.
The pay period refers to the week, two weeks, half-month, or month for which you’re paying your employee.
For employees paid an hourly wage, include the number of hours the employee worked in that period.
If you’re doing payroll for your restaurant, the number of hours your employee worked might need to be broken down by role — server and bartender, for example.
Gross pay on a pay stub is an employee’s earnings for that pay period before payroll deductions, including taxes and contributions to insurance plans and retirement accounts.
Make sure to count tips, commissions, and bonuses in the gross pay calculation.
For example, an employee who makes $60,000 a year will have gross pay of $2,500 if the company issues paychecks twice monthly.
Hourly employees will multiply the number of hours worked by their hourly rate. Let’s say your ice cream shop’s cashier gets paid $15 per hour, worked 50 hours, and collected $50 in tips in the first half of a month. Her gross pay is $800 ($15 * 50 hours + $50 in tips).
Employers will take out a portion of their employees’ paychecks to make tax payments, contribute to retirement plans, and pay health insurance premiums.
Check out our small business guide to payroll deductions for a list of the most common payroll deductions.
Net pay is the amount that reaches employees’ hands at the end of the pay period. When you complete your monthly bank reconciliation, you’ll want to have your employee pay stubs handy to verify that the correct amount was withdrawn from your business checking account.
Vacation and sick time
If you’re thinking of a pay stub as a status report for each of your employees, it makes sense to include the vacation and sick time the employee has accumulated and used during the pay period.
It also leaves little room for uncertainty when you regularly remind employees of how much paid time off they’re allocated.
Include year-to-date statistics for the above categories to give you and your employees a better idea of their earnings history. Year-to-date statistics are a tally from January of the current year to the date of the pay stub.
An employee who makes $60,000 per year will have earned half of her annual pay by the end of June. Her year-to-date gross pay on June 30 is $30,000.
Similarly, an employee who earns 15 hours of vacation each month will see that she has accumulated 90 hours of vacation on her June pay stub.
As an employer, you should keep an eye on year-to-date earnings for your employees to make sure you’re staying within your company’s payroll budget.
An example of a pay stub
Payroll software Gusto produces nearly faultless pay stubs, which it calls earning statements.
The statement is designed to be read from top to bottom, starting with the building blocks of earnings: hours worked or base salary amount. If bonuses, tips, or commissions are to be paid, they’d appear in that section.
“Employee taxes withheld” lists the taxes that are removed from your employees’ paychecks, including federal, state, and local income taxes; Medicare; and Social Security.
“Employer taxes” are taxes paid by the employer and do not decrease employee paychecks. It’s unnecessary to include this section on a pay stub because it doesn’t affect your employee’s paycheck, and it might cause more confusion than insight.
“Employee deductions” list employees’ contributions to retirement plans, payments for health insurance, and other payroll deductions. If you offer a match for your employees’ retirement plan, that number appears in the “employer contributions” section.
Gusto’s pay stub doesn’t indicate whether each deduction is a pre-tax or post-tax deduction, but you’ll be able to infer that in the “summary” section, which brings all of the other parts together.
Finally, Gusto’s earnings statement shows the employee’s vacation and sick time accumulation since the beginning of the year; including this information can help reduce misunderstandings between you and your employees.
The pay stub includes year-to-date numbers for each section. That section is especially helpful for employers who need to keep an eye on their overall budgets.
How to create pay stubs for your employees
Payroll software makes short work of getting pay stubs to employees because it’s just one of the many products of a payroll service. For a small fee, payroll software offers help with one of the trickiest tasks small business owners have on their plates.
Payroll software for accountants often provides a 360-degree service that calculates tax withholdings, remits tax payments, makess required tax filings, and quickly churns out reports for analysis.
Employees have access to a portal where they can view their pay stubs and make adjustments to their retirement contributions.
If you employ only a few people and want to continue doing payroll on your own, find a free pay stub template on Microsoft Excel, or a pay stub generator online that has all of the categories covered above.
Every time you run payroll, manually fill in the information for each employee and deliver it with the paycheck.
Your employees will thank you for their pay stubs
For business owners who cut checks to their employees without the help of payroll software, it may seem like an unworthy and time-consuming task to create complementary pay stubs. But don’t underestimate the value of pay stubs both for your employees and for you as a business owner.