Running an organization has several internal operations that need looking after. It also means keeping detailed records of transactions, both internal and external. While there are accounting transactions for sales, purchases, rent and lease, there is also the element of paying the employees that work for you. As you provide them hourly wages or monthly salaries, keeping a proof of such payment for both the organization as well as the employee is of great use. These records can be printed physically or be present on an online platform for employees to access, known as pay stubs.
So what exactly are pay stubs and what do you need to know about it? This guide will help both employers and employees understand all that they need to know about pay stubs.
What Is A Pay Stub?
A pay stub is a written pay statement that reflects each and every employee’s salary details for every payment, be it on a month by month basis for as long as they are employed in your organization. A pay stub is also known as a paycheck stub, wage statement, payslip or salary slip. If your organization is one that provides its employees physical salary checks, traditionally, the pay stubs are included or attached to the check. In case your company makes a direct deposit to the staff accounts, they may access their salary slip or pay stub through an online link.
Pay stubs are a part of a salary check that consists of the break up and particulars of details about the employee’s cumulative salary. It itemizes the wages earned for the pay period and year-to-date payroll. The pay stub also takes a note of the taxes and other deductions removed from the employee’s gross pay. Additionally, the pay stub also displays the cumulative sum of money the staff members finally receive after all the deductions and taxes cut known as the net salary or wages.
As an employer, you have the option to provide an electronic or print form of a pay stub to your employees.Providing print or online copies of pay stubs in businesses is a compulsory process in most countries and their states. However, there are exceptions provided, but it is always a good business practice to provide employees a pay stub so they understand the break up of their earnings, while you can keep a record of the payments made to the staff for compliance purposes and payroll proof.
What Is A Pay Stub Used For?
A pay stub includes information that both employers and their staff can use. Employees are entitled to have their pay stubs as a record of their salary. Pay stubs can be used by employees to ensure that they were paid the proper amount and view the deductions made from their gross salary.
Pay stubs can help employers to settle any discrepancies in payment of employee wages and salaries. If there are any irregularities in payments found, this can be solved by reviewing a copy of the pay stub dating back to as many months.
In India, it is a statutory requirement to have copies of physical or electronic pay stubs provided to employees.
Pay stubs are to be compulsorily issued either in a printed format or online, in the official or local language. Issuing and keeping records of employee pay stubs are a statutory requirement for any organization.
What Does A Pay Stub Include?
An employee’s pay stub includes three basic elements, which are then further split into their own sub-sections. They are:
- Gross Salary or Wages
- Taxes, Deductions and Contributions
- Net Salary and Wages
To understand what each of them entail, let’s look at them individually.
Gross wages make the first part of the employee’s remuneration. The gross wages consist of the money owed by an organization or business to an employee before any deductions are made.
An organization can calculate their gross pay structure in their own way, depending on whether the employee is being paid a monthly salary or hourly wages. For hourly wage workers, you can multiply the employee’s hourly wage rates by the cumulative number of hours they have worked for you. To arrive at a salaried worker’s gross remuneration, you need to divide their annual gross salary by the number of months or the intervals that you make payments in each year.
An employee’s gross salary is noted first and foremost on their pay stub. Details about the gross salary are segregated into 2 columns, where one shows the current gross salary or wage, while the other column provides the year to date figure. The following particulars are part of an employee’s pay stub.
- Hours or Days Worked: The total numbers of hours or days worked by the employee, including any leaves that are non-deductible.
- Pay Rate: The agreed upon hourly wage or a breakup of the monthly salary for employees.
- Gross Pay: This is the amount arrived at when the number of hours or days worked is multiplied by the rate of payment for each employee before any deductions.
- Sick Pay
- Holiday Pay
- Vacation Pay
- Payroll Advances
Taxes, deductions, and contributions
Employees do not take home the amount earned as their gross salaries. Taxes and other deductions made to their gross salaries can substantially decrease their earnings. The pay stub categorically displays information about such deductions so that the employees can review the amounts subtracted from their gross salary or wages.
Like gross pay, the taxes and deductions category is segregated into two columns. One column displays the current deductions, while the other shows the year to date total. The following are the most conventionally seen deductions on pay stubs.
- Employee tax deductions: the employer is bound by governmental and statutory laws to deduct tax at source from the employee’s gross salary. They are also supposed to deduct professional tax if the employees fall under the purview of such taxes. Depending on the country and their respective payment of tax laws that preside over organizations, each employer has to deduct the proper amount from gross salaries.
- Benefits and other deductions: Other deductions on the pay stub can vary depending upon the organization and the employee themselves. Some deductions may be in like with small business organization’s advantages such as charitable causes, loans or more. The deductions also include loan installments or the repayment of advances/bonuses that are to be deducted directly by the employer. Organizations also deduct gross salaries for holidays taken beyond the allowed limit.
- Employer contributions: Some items that are part of an employee’s pay stub are not directly deducted from their gross pay. They reflect the amount that an employer contributes for their employee. For example, the employer’s contribution to the employees provident fund and other such schemes such as insurance for the employee make part of such payments.
The net salary is the amount remaining after making all the deductions from the employee’s gross salary. This is the employee’s take home salary. The net salary is the amount that the organization writes on the employee’s check or makes a direct deposit into their bank account.
Why Do You Need a Pay Stub?
Employees may need a pay stub for several reasons. The first and foremost is that a pay stub allows such staff members to file such slips while taking note of what their deductions and contributions are. When there is a
substantial difference between the gross and net package, most of the times the deductions involved are taxes deducted at source, employee’s contributions to their pension or savings, loan installments, or other contributions for memberships or advances received. By having access to physical pay stubs, they can refer to such information dating back as long as they have records of any confusion or misunderstanding. These pay stubs also play an important role during tax returns filings, where the chartered accountant of the employee may need such proof to calculate and file their annual returns or plan for tax savings.
Other reasons for needing pay stubs can be:
- Applying for loans
- Applying for credit cards
- Signing rental or lease agreements
- Buying property or a home
- Purchasing automotives such as a car
An employer needs a pay stub to file for proof of compliance and to provide these details when requested by any government official for inspection. They can also provide such copies to their employees when needed for their purposes or to clear out payment related disputes.
How To Understand Information On a Pay Stub?
If you are a business owner, you will not receive a conventional pay stub like the employees working under you. However, understanding the information provided in a pay stub can help you resolve many issues. Each employer is supposed to understand how to create and interpret their employee’s pay stub so they know what exactly they are paying their employer for.
In the event of an employee resigning or being fired, the company needs to pay them and settle any unpaid dues as soon as possible. There may also be a severance package involved. Being aware of the pay stub information as an HR professional makes the process more streamlined for human resources to complete all formalities. The more familiar the business owner or the HR staff are with the components of a pay stub, the quicker they can scan for the correctness of information and pay the workers.
Reviewing of employee pay stubs can also highlight mistakes being made. The payroll managing HR professional can check pay stubs for the correct wage rate, hours worked, and the total salary or wages due. If the amount seems suspiciously high or low, you can point out errors in advance to avoid any penalties for defaults and conflict with your employees.
How Long Are Pay Stub Records To Be Kept?
Pay stubs are recorded and stored for any period between 4 to 7 years by an organization depending upon the government regulations as well as the personal policies. Some organizations also store a record of their pay stubs for a period of 10 years on their backed up database.
Best Practices For a Pay Stub
As per the rules set by the government in relation to pay stubs and salaries, an organization’s first best practice is to ensure that all their staff has access to their respective pay stubs. In most of the cases, this means printing a hard copy, even though they can access the pay stub through an online portal of your payroll software. Not all levels of employment have access or knowledge of using the internet, so a salary slip is essential to be provided in their cases. In accordance for what must be included in a pay stub, these are a few particulars to make your pay stubs are consistent:
- Employee’s name
- The pay period and date of payment
- Hours or days worked by the employee
- Gross salary or wages
- Net salary or wages
- Deductions that include taxes, EMI, and contributions by the employee
- Salary deposit information
Finally, you can consider removing the barriers your employees might face while retrieving a pay stub. During times of work from home in a pandemic, you can email them their pay stub. There are also occasions that need employee pay stubs such as applying for loans or filling out a rental agreement. Since this process requires pay stubs of n number of months as required by the third party, providing such records to employees will help them immensely.
Now that you know all there is to pay stubs, why they are a mandatory compliance for organizations and the role they play among employers and employees, you can tell that it is a long process to generate multiple pay stubs, release them on time and keep records of past pay stubs in case they need to be referred to. To make this job easier, Deskera has a solution that can automate the generation, distribution and record keeping of pay stubs on the behalf of the employees, thereby, regularizing compliance. Our payroll software is meant for just this purpose and serves multiple scales of business.