As an employer, one of your top responsibilities is managing payroll. Payroll can be complex, especially for employees trying to understand their wages or salary. Pay statements come into play to help break down payroll. Pay statements, also called a pay stub or wage statement, are documents given to employees each pay period by their employer. But what are payroll best practices, and how can you ensure effective payroll management? In this guide, we’ll walk through everything you need to understand about pay statements, from maintaining compliance to frequently asked questions.
What Is a Pay Stub?
Before diving into the complexities of pay statements, what is a pay stub? A pay stub is often used interchangeably for pay statements or wage statements. It is a document given to employees by employers that breaks down important wage or salary information like wages earned and deductions for taxes, insurance, retirement contributions and other deductions. Pay statements are often given with an employee’s paycheck, making it easy for them to understand the breakdown of the compensation they’ve earned for a particular period.
Why Do Pay Stubs Matter to the Employee?
There are several reasons why pay stubs matter to employees, with understanding earnings as one of the top reasons. Pay stubs are essential documents allowing employees to see their gross pay before deductions, as well as how much they’re being paid for their work. Other reasons why pay statements matter to employees include:
- Transparency: Pay stubs help ensure transparency, as they outline the deductions and withholdings, such as Social Security contributions, taxes, health insurance premiums and retirement fund contributions. They help employees understand where their money is going and how certain deductions impact their pay.
- Taxes: Pay statements are also important to employees because they provide key tax information needed for filing their yearly income tax returns. Pay stubs provide information on their taxable earnings and tax withholdings, ensuring they pay the right amount of taxes each year.
- Budgeting: Employees can also use their pay statements to help create effective personal budgets. With information on their net pay, employees can use their pay statements to plan their expenses and manage their finances, as they will know the exact amount they will take home to prepare for various life expenses, like rent, food and utility bills.
How Long Should You Keep Pay Stubs?
A general rule of thumb is to keep pay stubs for at least three years, even if an employee has departed your company. However, certain states may have their own guidelines regarding the length of time to hold onto pay stubs. Payroll solutions, such as those offered by Experian Employer Services, allow you to digitally store pay statement information, and allow for former employees to access their old pay stubs even after leaving the organization.
Why Pay Statement Accuracy and Accessibility Matters
One of the key reasons why pay statement accuracy and accessibility matters is for resolving disputes. Pay statements help improve transparency when it comes to the compensation employees earn for their work. When a pay dispute arises, the employer and employee can turn to the pay statement to review information regarding hours worked, compensation and deductions.
Pay statement accuracy and accessibility also matter for compliance reasons. While no federal laws mandate employers to provide employees with pay statements, many states do, and some may have certain requirements when it comes to offering electronic pay statements, such as receiving consent. For example, California requires an itemized wage statement for an employee paid an hourly wage.
Components of an Effective Pay Stub
Pay stubs should include key information regarding the breakdown of an employee’s pay. There are several key components, including gross pay, net pay, deductions and pay rate. An effective pay statement should be clear, concise and easy for employees to understand, accurately reflecting their earnings to ensure compliance and transparency. Explore some of the pay stub basics and what each component means in the following section.
Pay Stubs: The Basics
Pay statements provide valuable information to employees so they can better understand the breakdown of their earnings. Some of the main components of an effective pay stub include:
- Contact information: At the top of most pay statements, you will find the employer’s contact information, as well as the date of the pay statement and the employee’s name and address.
- Pay rate/compensation: There will be a pay rate or salary information, as well as the number of hours earned, that outlines different pay rates for that particular period, such as regular, overtime and double-time pay.
- Gross earnings: This is the total amount of money the employee earns before any deductions.
- Deductions: Under the deductions section, there will be a list of deductions taken from the gross earnings, such as state, local and federal taxes, FICA contributions toward Social Security and Medicare, health insurance premiums, retirement contributions and other types of deductions.
- Net pay: Also known as take-home pay, net pay is the amount employees receive after all deductions are subtracted from their gross earnings.
- Year-to-date totals: Most pay stubs will include information about year-to-date earnings and deductions, showing the cumulative total from the start of the calendar year to the current pay period.
- Paid time off: Pay stubs will also include paid time off (PTO) information for accrued hours for vacation, sick or personal days.
Customizable Formatting
When it comes to effective payroll management, one of the first qualities you should look for in a payroll service provider is the ability to create custom pay statements and customize the formatting of your pay statements. Customizable formatting makes it easy to include any of the necessary information you need for your employee groups.
Support for Multiple Languages
Another key payroll best practice is ensuring your payroll solution supports multiple languages. Having a diverse workforce can help build an inclusive and innovative culture, and supporting employees of all backgrounds by offering pay stubs that are in their preferred language can establish a sense of respect and belonging.
The Accessibility Factor
Effective payroll management includes the ability to access pay stubs anytime, anywhere. Offering universal access to pay statements, whether from a phone, desktop, tablet or other mobile device, ensures employees can view their pay statement information when they need it. Experian Employer Services has an online portal that supports universal access, so your team can see their pay information on the go, at home or at work.
Instant Notifications for Employees
Another payroll best practice is ensuring your payroll system offers instant notifications for employees. Notifications can come in the form of text and email alerts so your team can be notified the moment new pay statements are available.
State-Specific Pay Stub Requirements
One of the top payroll best practices is ensuring your pay statements are compliant. Each state has its own laws regarding how pay stubs should be sent, the information included on pay statements and more. It’s crucial to have a solution that makes it easy to abide by state-specific regulations.
Quick Tips and Best Practices for Your Pay Stubs
Take a look at some of these quick tips and payroll best practices:
- Be clear and transparent by offering pay statements that are easy to understand.
- Ensure timeliness by delivering pay statements for each pay period on time.
- Maintain compliance by abiding by local, state and federal regulations regarding pay stub requirements.
- List deductions separately for employees to understand where their money is going.
- Offer accessibility through secure online portals that allow staff to access electronic copies of their pay stubs.
Partnering With the Right Payroll Service Provider
Finding the right payroll service provider not only helps ensure compliance but also allows you to improve employee satisfaction through transparent and accessible pay statements. At Experian Employer Services, our pay statement services make it easy to create multiple types of pay statements to meet all company and state-specific requirements.
Pay Stub FAQs
How do you ensure pay statement accuracy?
There are several measures that can help ensure payroll accuracy. Verifying data, such as hours worked, wages and employee information can help maintain accuracy. Employers should also follow all local, state and federal compliance regulations, as well as have a clear system in place to reconcile any pay discrepancies to ensure employees are paid accurately.
How do you avoid payroll errors?
To avoid payroll errors, partnering with a trusted payroll provider can help automate mundane tasks while ensuring accuracy. Through automation, you can easily run calculations to reduce manual errors and cross-verify payroll data.
Whose responsibility is it to correct errors on your pay stub?
When an error arises on a pay stub, both parties should work together to identify and resolve the issue. If an employee spots a discrepancy, they should report the error to their employer or payroll department. Employers are then responsible for rectifying the mistake.
What is the most commonly used payroll method?
There are several different types of payroll methods from which to choose. The most popular is direct deposit, where employees’ wages are electronically deposited into their bank accounts, offering a secure and convenient alternative to paper checks.
What is the most important part of payroll?
Of all the key pieces of payroll, the most important part is accuracy. Employees want to be fairly compensated for their hard work, and inaccurate pay statements can cause frustration and decreased trust. Pay statements should clearly articulate tax withholdings, benefit deductions and wages earned.