Breaking Down Employee Pay Stubs

Most businesses have at least a handful of entry-level positions, and that likely means employees are new to the workforce. Whether it’s the clean-up crew on a job site or a paid apprentice or intern, you could be handing over the first paycheck your employee has ever earned or seen.

And let's be honest - the much-used joke, "Who's FICA, and why do they get all my money?" isn't always an exaggeration. For those new to the workforce, the first pay stub or payment statement your employee payroll software spits out can be confusing.

Here's how to walk employees through what they're looking at.

What is a Pay Stub?

Employers need to break down how they arrived at the number on a worker's paycheck. A pay stub details how earned wages were calculated, including not earnings as well as any taxes, benefits and deductions.

  • A pay stub is typically attached to a check.
  • A payment statement is something that can be accessed that's separate from the check (if direct deposit was used, for example).

For our purposes, we'll consider pay stubs and payment statements the same because they convey the same type of information.

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How to Access Pay Stubs

According to the American Payroll Association, all 50 states allow for pay stubs to be made available solely by computer, as long as there's a way to print it out. However, many employers print them and deliver them by mail or by hand to employees. Give your employees instructions on how to access and print their pay stubs if yours are only available online.

"This is Not a Check"

Pay stubs come with a friendly reminder that your pay stub is not your check. Don't try to cash it.

Pay Stub Definitions

Your employee may be confused about what they're seeing on their pay stub, so here's a primer for them:

  • Pay Period: The date range they worked to earn their paycheck.
  • Earnings or Gross Pay: The amount your company pays them before any taxes or deductions.
  • Net Pay: The amount on the check; sometimes called take-home pay.
  • Withholding: Money the employer holds back from the check, such as for taxes.
  • Deductions: Any money the employer removes from employees' earnings for things like health benefits, retirement plans or union dues.
  • Benefits: Sometimes rolled into the deduction section, benefits are things like health, dental and life insurance that employees pay for through their work.
  • Accruals: If employees earn paid time off or vacation time, their pay stub may reflect their balances in this section.
  • YTD: An abbreviation for year-to-date. This shows how much each category has accumulated over the calendar year.

Taxes: The Other Half of Things You Can't Escape

Federal Income Tax: All workers who receive a paycheck pay federal income tax. This is money employer takes out of workers’ paychecks and send to the IRS. The amount is determined by the information workers provide in the W-4 form they fill out when they start their job. The government uses it to pay for thousands of things, from infrastructure and the military to education and unemployment.

State and City Taxes: Forty-one states and some cities collect taxes. If they do, employers send this portion of workers’ paychecks to the appropriate government office.

FICA Taxes

The Federal Insurance Contributions Act (FICA) is a shared tax between employers and employees. It goes toward:

  • Social Security Tax: Employers and workers both pay 6.2 percent of the taxable income to Social Security, which goes to funding the retirement, disability and survivorship benefits of qualifying Americans.

Medicare Tax: Like Social Security, employers and employees split this tax, with each paying 1.45 percent of the employee’s taxable income to Medicare. Medicare provides subsidized healthcare to the retired and disabled.

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Voluntary Deductions

Voluntary deductions are things employees elect to put their money toward and can apply to lots of things, but here are some of the most common.

Savings Plans

  • Retirement: If an employer offers a retirement plan, such as a 401(k), workers' pay stubs will show how much they contributed to this from their paycheck during this pay period.
  • Health Savings Accounts (HSA): According to SHRM, more than half of employers offered an HSA in 2018. If yours does and employees elect to contribute to it, they can see how much of their paycheck went there in this pay period.

Benefits

  • Health Insurance: SHRM reports only 16 percent of employers pay the full amount of health insurance costs for full-time employees, so it’s likely workers share the cost. The amount employees pay per pay period is shown on the pay stub.

Dental and Life Insurance: Like health insurance, employees choose whether to pay for these benefits. The cost is deducted from their paycheck.

Health, dental and life insurance are pretty common offerings, but certainly not all of them. Here’s a list of the most in-demand benefit offerings in 2019.

Union Dues

Voluntary or not (it depends on whether employees are in the private or public sector and if they live in a right-to-work state), if employees pay union dues, they will be shown on the pay stub.

We’ve shown some of the most common deductions and taxes, but certainly not all. There are other things that can show up on a pay stub, like child support withholding orders or garnishments for unpaid taxes. But, for your new employees, you can give them a good Pay Stub 101 course with this information.

Payroll can be complicated, but it doesn’t have to be. With a dynamic, automated employee payroll software, your data can be sliced up and doled out easily. We have a system designed specifically for payroll that integrates seamlessly with all aspects of core HR. Try a free demo today to see how your HR life can get easier.

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