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One of the keys to a company's success is the employer-employee relationship. A well-maintained and transparent relationship provides a strong foundation for the company. How to build one? It is easier than you think. One way is to create and maintain proper records of your employees' earnings and dues. A well-crafted pay stub is a great way to do that. It outlines the details of an employee's earnings and helps track taxes, deductions, and benefits.
In this article, we will walk you through an overview of how to generate pay stubs for your employees to ensure clarity and accountability in financial reporting.
What is a Pay Stub?
A pay stub is an official document given to employees along with their paychecks/salaries. This document contains all the information necessary to confirm an employee’s earnings, funds that you withhold from their gross pay, and their ultimate net pay amount.
Providing pay stubs, however, is not a federal obligation. But some states require you to generate, maintain, and provide pay stubs to your employees.
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Information Contained in a Pay Stub
To know how to make paystubs, you must know the essential elements generally mentioned on all pay stubs. Pay stubs typically include gross earnings, tax, other deductions, pay period, and net pay.
Here’s some information about each of these elements in detail.
Gross Earnings: The total amount paid to the employee for the particular pay period is their gross pay/earnings. It is also known as the pre-tax income of the employee. It would help if you recorded the hours worked, payment rate, and accrued time off to calculate the gross pay.
Tax Deductions: Taxes are the funds you withhold from an employee’s income as a federal, state, or FICA (Social Security and Medicare tax) liability.
Other Deductions: These deductions account for other funds contributing to health insurance premiums, savings accounts, retirement contributions, and involuntary deductions like garnishments or court-ordered child-support payments.
Pay Period: A pay stub should specify the days, weeks, or months the payments are credited for, along with the number of hours worked.
Net Pay: The amount of money your employee takes home after all taxes and deductions is their net pay. It is also called post-tax income.
Who Should Employers Create Pay Stubs For?
Generally, as an employer, you must create pay stubs for full-time and part-time or temporary employees.
An individual who works an average of 32-40 hours a week or 130 hours a month is classified as a ‘full-time employee’ by the IRS. If the number of hours worked crosses 40, employees are entitled to overtime pay as specified by the Fair Labor Standards Act (FLSA).
As an employer of full-time workers, you must provide pay stubs mentioning the hours worked, pay period, payment rate, and deductions. You may also mention the minimum wage and overtime pay rates if the employees are subjected to the same.
Part-Time Employees or Contractors
An individual who works less than 30 hours per week is considered a contractor. These individuals have a fixed and structured work schedule, like full-time employees. Additionally, they have an ongoing and permanent employment arrangement. The only difference lies in the distinction between working hours.
On the other hand, contractors are not subjected to a fixed or regular work schedule and ongoing employment. Simply put, they are hired on a project basis or for daily wage work. However, if such an arrangement continues for a reasonable amount of time, the line between temporary and part-time employees becomes blurred. This is where the risks of ‘misclassification’ increase.
Maintaining and providing pay stubs with all necessary information about working hours, pay period, pay rate, etc., is wise to clarify the distinctions between employees.
Need help with managing payroll and taxes for international contractors and employees? With Skuad as your Employer of Record, you can easily simplify and automate multi-country payroll.
How to Make a Pay Stub for Employees
If you’re wondering how to make pay stubs for my employees, follow the steps below. As a pay stub contains information about gross pay, hours worked, taxes, deductions, and net pay, you must clearly understand your workforce and the nature of their employment.
1. Determine the nature of employment for your employees.
The first to know how to generate a paystub is determining the nature of employment and the number of hours worked. There are two primary categories of employment: salaried and hourly.
Salaried employees: Full-time and part-time employees fall under this category as they have a pre-determined pay rate and number of hours attributable to the work.
Hourly employees: Generally, hourly employees refer to temporary workers whose hours are separately recorded daily. There could be an agreement to decide the total number of hours worked.
2. Determine gross pay.
The next step is to calculate your employees' gross pay as follows.
Gross pay is the pre-decided amount offered to all salaried employees when hired. It also includes additional bonuses or commissions. Moreover, if the salaried employees have worked overtime, they are entitled to an overtime payment per the Fair Labor Standards Act. The act ensures that employees get 1.5x the salaried pay for each overtime hour.
Overtime Hourly Pay = Salary Per Hour x 1.5
Total Overtime Payment = Overtime Hours x Overtime Hourly Pay
Gross pay + Overtime payment = Total Gross Pay
Intuitively, gross pay for hourly employees is the total pay + additional tips/overtime.
Hours Worked x Pay Rate = Pay Per Period.
3. Determine deductions and taxes.
A part of how to make a pay stub is answered by calculating taxes and deductions and finally subtracting it from the gross pay. You’ll start by ascertaining whether the deductions are pre-tax or post-tax. Compile a list and deduct the amounts accordingly.
Pre-tax deductions include insurance premiums, retirement contributions, 401(k), 403(k), etc. On the other hand, post-tax deductions include Medicare (1.45% of employer’s income), donations to charity, garnishments, union dues, etc.
4. Subtract the non-taxable pay from the gross pay.
Exclude the non-taxable portion of the pay before withholding taxes. Non-taxable income includes disability insurance, health savings account, etc.
Gross pay - Non-taxable income = Taxable Income
5. Subtract tax deductions from the taxable income.
The last step is subtracting taxes from the taxable income to get the net pay.
Gross pay - (Pre-tax + Post-tax Deductions) = Net Pay
Moreover, with Skuad’s payroll calculator, undertaking all the above calculations becomes automated, saving you significant time.
6. Report all the information in a pay stub.
Lastly, report all the calculations and final values on a pay stub. You can use freely available templates to generate pay stubs for your employees. Below is an example.
Importance of Pay Stubs
While you’re learning how to create paystubs for your employees, it is crucial to take a few moments and reflect on the benefits it will accrue to you as an employer and to your employees.
For Employers and Employees
Pay stubs are a vital document that benefits both employers and employees. Employees get a ‘proof of employment’ and all necessary salary information with a pay stub. On the other hand, for employers, it doubles as a confirmatory document to compare wages and labor records.
For Self-Employed People
Additionally, pay stubs might not appear to be very purposeful if you’re a self-employed individual. But it is a myth that we’ll debunk. Even as self-employed, tracking your earnings and filing your taxes is vital. Besides, if you are working with contractors or subcontractors, maintaining pay stubs will be a wise practice to keep a record of your business profit.
Manage Payroll and Taxes Compliantly with Skuad
Maintaining records of salaries, calculating taxes and deductions, and ultimately generating pay stubs becomes challenging, especially if you have a sizeable workforce. With Skuad as your Employer of Record (EOR), you can experience hassle-free global payroll management and complaint tax filing. Book a demo today to see how Skuad can help.
1. How can I check stubs online?
Ask your employer about the payroll service website to check for pay stubs online. Once you know the website, log in using your credentials to access your pay stubs.
2. What are the common mistakes when creating a pay stub?
Common mistakes when creating a pay stub are:
Missing payroll tax deadlines,
Lack of a backup system for payroll data,
Misclassification of company workers,
Tax calculation errors,
Incorrect tax filing.
3. How to identify a fake pay stub?
Unfortunately, many websites indulge in unfair practices of generating fake pay stubs. They might look legitimate and indistinguishable; however, subtle hints exist to identify scammers and fake pay stubs.
Confirm and cross-check with bank statements.
Check decimal point alignment. It might sound irrelevant, but fake pay stubs have decimals that are not aligned.
Do the dirty math. Verify all calculations, including taxes and deductions, to ensure the numbers are legit.
Always verify generic information. More often than not, scammers skip on the tiny details and make errors while duplicating generic information like address, email, etc.
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Nathan Williams is a Global Payroll Specialist and Finance Consultant. With a background in banking and finance, he is passionate about modern tech practices in payroll management and using global payroll platforms for global payments.