- A pay stub is a financial record that shows the breakdown of an employee’s paycheck.
- A pay stub includes gross wages, commissions and bonuses, taxes, and health insurance premiums.
- While you can manually create a pay stub, payroll services make the task substantially easier.
- This article is for business owners who want to better understand pay stubs and how to create them.
If you have employees, it’s crucial to generate pay stubs for each pay period. Pay stubs serve as a receipt of payment of wages and withheld taxes; they also provide employees with a breakdown of their pay, including deductions. Creating pay stubs manually can be tedious, but any good payroll software or service makes it easy.
What is a pay stub?
A pay stub is a financial record that shows an employee’s paycheck breakdown. Stubs show an employee’s gross income during a specific pay period, including wages, commissions, bonuses and tips. Pay stubs also list itemized withholdings for taxes, such as Medicare and Social Security (FICA), and deductions for items like health insurance premiums and employer-sponsored retirement plans. [Related article: How Many Pay Periods Are in a Year?]
A pay stub serves as a payment receipt for the employer. It’s also a record of how much was withheld from each employee’s paycheck and for what purpose. Historically, pay stubs were attached to employees’ physical paychecks, which is how they got their name. Now, pay stubs are usually offered digitally and – for employers that use a paperless payroll or a payroll service – are available online to download when needed.
While employers are not required by federal law to provide employees with pay stubs, they’re an essential part of payroll accounting and are considered a best practice in payroll accounting.
What is included in a pay stub?
Pay stubs break down an employee’s income for a given pay period. They start with an employee’s total gross pay for the pay period. They also include notes for amounts withheld for items like taxes and employee-elected deductions for health insurance premiums and retirement plans, such as a 401(k) plan. [Learn the difference between net and gross income.]
Here are some items that appear on a pay stub:
- Gross wages: Gross wages are the amount the employee earned for the covered pay period, whether based on an annual salary, an hourly rate, or another arrangement. [Related article: Should You Pay Employees a Salary or Hourly?]
- Commissions and bonuses: A pay stub includes any additional payments (besides reimbursements) from the employer to the employee, such as commissions and bonuses. [Learn how to calculate bonus taxes.]
- Taxes: Any federal, state or local taxes withheld from an employee’s check, including those for Medicare and Social Security, are also reflected on a pay stub (and itemized).
- Health insurance premiums: If you offer health insurance to your employees, any employee payments toward health benefits are included as deductions against the employee’s gross pay.
- Retirement plan contributions: Contributions to a 401(k), SIMPLE IRA or other employer-sponsored plan are also included if the employee elects such deductions.
While pay stubs may include tips or bonuses paid by the company, they don’t include tips customers directly pay.
Why are pay stubs important?
Creating pay stubs is an essential part of processing payroll because they serve as a receipt of payment for employers. They verify that taxes were withheld as required for a given pay period, as were employee deductions for health benefits and retirement plan contributions. [Follow these eight easy steps to process your payroll.]
While pay stubs are of limited importance to employers, they’re far more significant to employees because they show a breakdown of their pay. They also represent proof of payment, which is important when the employee wants to get a loan. If an employee applies for a mortgage, most lenders request one or two months of pay stubs.
Who should employers create pay stubs for?
While employers aren’t required by federal law to generate pay stubs, it’s important to create them for all employees. As the business owner, you should also create pay stubs for yourself if you pay yourself a salary. These pay stubs provide proof of gross wages and deductions for taxes and other items; they’re critical if you or your employees want to get a mortgage.
However, it’s important to note that if you own a company set up as an LLC taxed as a partnership, there’s no such thing as salary. Any money paid to owners is considered a profit distribution, and pay stubs probably aren’t necessary. [Related article: Which LLC Taxes Must Your Business File?]
FYI: If your business pays independent contractors, you can still generate pay stubs, though they’ll be abbreviated if you aren’t withholding funds for taxes or other benefits. However, a copy of the contractor’s invoice and a canceled check are often a sufficient payment record.
How to make a pay stub for your employees
The easiest way to make pay stubs for employees is to use one of the best payroll software providers, accounting or payroll software, or a pay stub generator. While it’s possible to generate pay stubs manually, it’s not really necessary. If you want to create pay stubs manually for W-2 employees, though, here’s the process:
- Start with the employee’s total gross pay for the pay period.
- Add deductions for taxes withheld (federal, state, and local if applicable, as well as FICA).
- Deduct the employee-paid portion of health insurance premiums.
- Deduct employee-elected retirement plan contributions.
- Add any other deductions (such as for other insurance coverages).
- Calculate net pay (the amount that goes on the employee’s paycheck).
After you generate a pay stub for an employee for a given pay period, attach that pay stub to the check (if you’re issuing a physical check). Optionally, provide pay stubs digitally by email or through an online portal.
While you can create your own pay stubs, it’s much easier for small business owners to use payroll software or a payroll service, which will automatically calculate employee pay, withhold taxes and calculate deductions. These options also create pay stubs automatically and make them available digitally through an employee portal.
Key takeaway: While it’s possible to generate pay stubs yourself, it’s unnecessary to do payroll accounting manually; you’d be best served by using payroll software or services.
Should you make your own pay stubs?
Following the process above, it’s easy to generate pay stubs for your employees, though it can be tedious and a little time-consuming. If you want to make your own pay stubs, numerous pay stub generators and templates are available online. Templates are available for Excel and Word and vary by state and employee type.
However, using a template or other tools to generate pay stubs yourself also requires you to stay current on federal and state tax brackets and rates, employment tax rates, and other policies on withholding and deductions. You’ll need all this information to calculate each employee’s itemized deductions and withholdings accurately and to issue correct net pay amounts. Because of the time involved, it’s usually much easier to use specific software or choose a payroll service to handle these functions.