1. Pay stub definition: A “pay stub” is a document that outlines payroll information about a particular employee for a certain pay period.
2. A “pay stub” can also be known as a paystub, payslip, pay record, paycheck, or wage statement in other countries.
3. A pay stub, or paycheck, is important for both employers and employees as it outlines the exact gross salary that an employee is receiving along with the relevant deductions and contributions. This avoids any confusion as both parties are able to clearly see how the calculations have been made. Pay stubs may also be required as proof of earnings or employment in certain situations such as renting or buying a home.
4. There are three main types of taxes that are typically deducted from an employee’s wage in the United States and therefore appear on the pay stub: Federal income taxes, state and local taxes, and Federal Insurance Contributions (FICA).
5. Contractors are required by law to declare their earnings and file their own taxes and therefore, in order to avoid contributions from being mistakenly withheld, contractors should not be put on the payroll and be given a payslip, or be treated generally as employees.
Correctly paying employees and keeping in line with tax laws is vital for companies. In some jurisdictions, this can include ensuring that paystubs are accurately generated.
Paystubs are important because they lay out information about an employee’s wage during a certain period of time. They are useful to help avoid any confusion or disputes regarding pay as they clearly outline where percentages of the wage are being deducted and why. Depending on the locality, different requirements are expected to be met when it comes to paystubs, although generally the same kind of information should be included. Companies must be particularly aware of the mandatory statutory tax deductions and employee contributions that have to be made to ensure they are complying with the particular jurisdiction they are operating in.
What Is the Meaning of ‘Pay Stub’?
A ‘pay stub’, is any document that outlines payroll information about a particular employee. It includes employee details such as their name, the pay period/applicable dates of payment, payroll number, gross income, net income, tax deductions, other contributions, tax code, and other relevant details.
This ‘pay stub’ definition fits what is referred to as a ‘payslip‘, ‘pay record’, ‘check stub’, or ‘wage statement’ in various countries. Typically, a paystub is issued to an employee each month, or sometimes each week, depending on how frequently a company pays its staff.
Whilst a paystub is a simple document, it is important that they include the right information in order to be compliant with tax and labor laws. Paystubs are useful as they help an employee verify how much they are paying in taxes and how much they are receiving after tax: I.e., The gross pay vs net pay distinction. It also allows employers to easily resolve any issues regarding pay calculations fairly efficiently.
In Georgia USA, an employee who ended employment with an auto repair store filed a claim with the US Department of Labor when his final paystub failed to arrive. The paystub did eventually arrive, along with a pile of oil-stained pennies amounting to $915! This was supposed to be the employee’s final wage, but instead of making a bank transfer, the employer decided to be extra awkward and deliver his wage a bit differently. Whilst it is not illegal to pay an employee this way, it could be argued that it was morally wrong of the employer as the employee was left to find somewhere to put all these pennies and clean each one!
Video: How to Read a Pay Stub
In the video below, Gusto walks through a sample pay stub, and explains what pay stubs are used for.
How to Get a Pay Stub
Employers can generate paystubs in different ways. Employees can receive a physical document handed to them in person or via post. They can also access paystubs online through a secure payroll system where employees can download or print off their digital paystubs.
It is important to check your pay stub regularly to ensure that all deductions are being made correctly.
Some companies generate their paystubs internally and some decide to outsource such payroll tasks to a third party such as an accountancy firm or specialist payroll firm. The main benefit of outsourcing payroll to a third party, apart from convenience, is to ensure legal compliance. This may be particularly beneficial for international companies that operate in different countries and therefore hire employees around the world. Keeping in line with different employment and labor laws can be a challenge.
Are Pay Stubs Required?
Across the USA, some states don’t require employers to generate pay stubs, while in other states pay stubs are mandatory, but the rules vary on what details must be included. Companies should check with local laws to ensure they are providing pay stubs displaying accurate information when they are required to do so.
Regardless of whether pay stubs are required or not by law, they are helpful for employees as they can not only clearly see the breakdown of deductions and earnings, but they are also sometimes required for proof of earnings for things like renting, leasing, purchasing property, getting a mortgage and applying for loans.
There are three main types of taxes that should be detailed on the paystubs including, federal income taxes, state and local taxes (which vary between states) and Federal Insurance Contributions (FICA) set out by the IRS which ensures that every taxpayer contributes to Social Security and Medicare (often referred to as payroll taxes). In addition, paystubs will often include other payroll deductions such as insurance, or health savings and flexible spending accounts which allow individuals to put money aside for health and medical expenses. Also, most pay stubs will include retirement plan contributions such as IRAs or 401Ks and the amount deducted will be dependent on how much the individual has agreed to contribute.
Additionally, pay stubs should outline the number of hours an employee has worked in a certain period of time, and sometimes the hourly wage may be included in order to help calculate the overall pay for that period. If an employee received benefits or has completed overtime, this should also be included.
For international employers, it is important to be aware of the rules for the countries in which they operate. For instance, in some countries, holiday bonuses, or ‘13th month pay‘ are required by law and in others, holiday bonuses are discretionary. Either way, this will need to be reflected in the pay stub. Companies must therefore understand that requirements for paychecks will vary depending on the country.
Do Independent Contractors get Pay Stubs?
An independent contractor is someone who provides a service(s) to multiple clients and is paid based on the particular service they provide.
As independent contractors are being paid by a company to complete a service, it is a common mistake for companies to assume that contractors should be part of ordinary payroll processing and therefore be handed a paystub. In fact, independent contractors and employees must be treated separately. Contractors are required by law to declare their earnings and file their own taxes and therefore in order to avoid contributions from being mistakenly withheld, contractors must not be treated like employees otherwise, there may be an issue with regards to disguised employment, which can incur heavy penalties.
Therefore, in order to be compliant with tax laws, independent contractors should invoice the firm which will demonstrate a record of payment. Generally, contractors are not issued with a pay stub as there are no deductions, contributions, or benefits involved when it comes to the relationship between contractor and company.
Horizons Manages Pay Stubs
It is vital for companies to verify whether pay stubs are required in the place they are conducting business, along with ensuring the paychecks satisfy the rules.
At Horizons we work closely with companies to ensure that they are staying compliant with international labor and tax laws, particularly relating to payroll, taxes and holiday bonuses. Horizons is a global PEO (“Professional Employer Organization”) which means we act as the ’employer of record’ of our clients’ international employees. This means that we are responsible for payroll and taxes for those employees, and therefore you will always be compliant with varying international laws and regulations.
We work closely with all our clients to work out what is best for them to successfully manage their international workforce. Do not hesitate to contact us for further information on global payroll.