What Goes Into a Paystub?

Employees might not think much of their paycheck stubs, but these receipts can be more valuable than they know. A paystub is the best proof of income, which lenders, creditors, government agencies, and other entities often require for loans, public assistance, and credit card applications.  

But more importantly, a paystub holds a record of hours an employee has worked during a pay period and how much paid time off they’ve accrued. Employees can use their paystubs to keep track of their hours, budget for expenses and to plan vacation time. A paystub can provide employers with data used for recordkeeping, as mandated by the Fair Labor Standards Act (FLSA). Although the FLSA has no paystub requirements, employers must provide workers with information about their pay under states’ laws.

With many employers offering automatic payroll deposit, fewer workers receive “live” paychecks and instead have electronic access to their pay records. Some states, however, require employers to issue workers live paystubs under special circumstances.

Line-by-line entries

Paystubs differ in layout, design, and sometimes content, such as employees’ benefit selections. But all paystubs contain must-have entries, such as “gross wages,” “net wages” and “federal income tax” subtractions and abbreviations for time used. Paycheck entries line-by-line include:

• Current. This is the period for the earnings data, designated by month, date, and year.
• YTD. Paystubs often use this abbreviation for “year-to-year” to show data for both the current pay period and other periods up to that time.
• REG. Regular hours refer to an employee’s normal workweek, which typically is 35 or 40 hours.
• OT. Overtime is the number of hours worked beyond a regular workweek. The FLSA specifies that hourly, or nonexempt, employees be paid 1.5 times their base wage for every hour worked beyond a 40-hour week.
• SICK. This entry is for sick time used.
• FL. Family leave time taken, if any, is shown on this line.
• VAC. This entry shows how much paid vacation time was used.
• HOL. Paid holidays used are posted here.
• Gross wage. The easiest paycheck calculations are employees’ gross wages, or the amount they earned before tax withholdings and deductions kick in.  For hourly workers putting in 40 hours a week for a base pay of $12 an hour, their gross wage is $480 a week. For salaried workers earning $50,000 a year, the gross wage is their annual wage divided by the number of annual pay periods.
• Net wage. When tax withholdings and deductions are subtracted from employees’ gross earnings, the result is their net wage.
• Federal income tax. Employers withhold this tax to submit to the IRS. This withholding can amount to as much as 25 percent of the average American’s income, depending on their tax bracket. Employers calculate workers’ federal income tax based on:
  • Workers’ taxable gross earnings, after pre-tax withholdings, are taken out.
  • Workers’ marital status
  • How many allowances workers claim on their W-4 form

Federal income taxes consume the largest share of employees’ earnings, but they might recoup a portion of it through an income tax refund in the following tax year. The IRS has a withholding calculator for employees.

• State income tax. States have various income tax rates, ranging from zero percent, as in Florida, and from 3 percent to 6.99 percent in Connecticut (depending on a resident’s tax bracket).   
• City and local taxes. Cities or towns and some local jurisdictions have a tax entry on employees’ paychecks. The tax varies depending on the city or town where employers do business and workers live. Some state or local jurisdictions have flat tax rates, while others have more complex tax-bracket systems.

States that administer State Disability Insurance (SDI) will have an entry on workers’ paychecks showing how much their contribution is to the SDI fund.

Employers should consult their local tax specialists for updates on the rules.

Taxes both employers and workers pay

Employers and employees are both responsible for paying taxes on Social Security and Medicare. The employer’s half of the payment is a matching contribution to the worker’s portion. However, only the employee’s deducted payment is entered on the paystub.

Social Security

Congress passed the Social Security Act of 1935 to allow American workers to supplement their retirement income. The maximum annual wage for Social Security eligibility is $128,400 for the 2018 tax year. Employers and workers both pay 6.2 percent of the workers’ gross pay to cover the tax.

Medicare

Pres. Lyndon B. Johnson made this national health plan the law in 1965, allowing Americans to supplement the cost of medical care for their later years through payroll deductions. Employees are required to pay 1.45 percent of their gross income to cover Medicare. Employers also contribute 1.45 percent of workers’ gross earnings. Without an earnings limit like Social Security’s, a Medicare tax affects every wage earner’s gross income and imposes an additional tax on income above $200,000.

The Federal Insurance Contributions Act (FICA) entry on paystubs breaks down the contributions between Medicare and Social Security.  

Pre-tax withholdings

Workers’ enrollment in some employer-sponsored benefits programs allow them to lower their taxable income and reduce the employer’s payroll taxes. These paystub entries are pre-tax withholdings on workers’ gross pay. Examples of these benefits are:

• Retirement savings accounts, including 401ks and 403(b)s
• Health savings accounts (HSAs) and flexible spending accounts (FSAs)
• Insurance coverage premiums
• Childcare assistance

Voluntary and mandated deductions

Besides tax withholdings and pre-tax deductions, employers might need to reduce workers’ net pay under other entry categories on their paystubs.

Voluntary deductions

Employees might choose to have other after-tax deductions from their pay. These include contributions to a college savings fund, such as a 529 college savings plan; donations to an employer-supported community fund, such as the United Way; or fees for union dues.   

Court mandates

A court order could require an employer to deduct a worker’s wages to satisfy a debt, provide child support or pay alimony to a former spouse. Since court mandates can be burdensome for employers, some wage garnishments include a fee that employers also can deduct from workers’ pay as reimbursement for their administrative costs.

The paystub takeaway

Keeping track of employees’ work hours, pre- and after-tax withholdings, and voluntary and mandated deductions require precise calculations, along with diligent record-keeping. Small businesses have the electronic tools to make the process less time-consuming and the results more accurate.  

And finally, employers should encourage workers to review their paystubs. Occasionally, records need updating or mistakes could be made. Employees should review their paystubs to make sure entries are up to date and to report any apparent errors in the data.

Note: This article was originally posted 9/2018 and has since been updated.