updated - September 29, 2020 Tuesday EDT
You can save a great deal of time and money by making sure that you handle pay statements accurately.
If you're not careful with your employee pay stubs, you could expose your company to lawsuits from every employee that you've hired, ranging back four years. Something as simple as a misplaced comma could expose your company to liability.
This scenario isn't pure conjecture. Business owners face this kind of liability every day. In fact, many employees in California have filed millions of dollars of lawsuits for this exact kind of mistake.
How Do You Define Pay Stubs?
A pay stub is also called a payslip. It's a document that itemizes how much you pay your employees. For each pay period, you must issue a pay stub to your workers which shows the pay period, deductions and net pay. For instance, a pay stub might include:
Highlighted take-home pay
State and Federal Tax deductions
When you pay employees with a paper check, it should include a stub that's attached to it. When you pay your employees by direct deposit, you should also give them the option to print their check and pay stub. If you have to pay overtime, you can use a paycheck calculator to figure out how much extra money you have to include on each employee's check.
A convenient pay stub website can help you to calculate the right deductions and estimate their net pay. By helping you, for instance, to figure out how much money to take out for taxes, FICA, healthcare, retirement, and other deductions. You can use a pay stub template to make this part easier.
Playing it Safe
By using a paycheck calculator, you can make sure that you've entered the right information for tax season. You'll also have the right information to compare actual withholding against IRS recommendations.
When you hire a new employee, you need them to fill out a W-4 form. A W-4 will tell you how much to deduct from your new employee's check for taxes and benefits.
It's helpful to provide employees with enough information so they can make informed decisions about the correct withholding amounts. Employees can also find out more information about tax withholding by using the IRS's free tax withholding estimator tool. It's helpful for employees to have their financial affairs in order for when they want to apply for a loan, rent an apartment or buy a house.
Employees may also need accurate paycheck stubs to verify their employment and salary history. For instance, you may want to see an employee's pay stub as part of the hiring process to ensure that you have an accurate salary history for your potential new hire.
It's important to verify information about your employees. The more that you know about your employees, the smoother their transition into their new role. In regard to human resources information, you must also save pay stubs-as either hard copies or digital images-in case something goes wrong.
The Basics of Pay Statements
In California, U.S. Labor Code 226 mandates certain rights for employees who receive inaccurate pay stubs. According to the legislation, employees can recuperate the greater of the total of damages or $50 for the initial pay period in which a violation occurs, as well as $100 per employee for each violation and subsequent offense.
Altogether, your organization could become liable for up to $4,000 in penalties and the cost for attorney fees if you do not maintain accurate pay stub records. A payroll company does not free you from this legal obligation.
It's your organization's responsibility to provide complete and accurate pay stubs in a timely fashion. Failure to do so can result in significant fines.
In California, you must provide specific information on pay stubs. Legislators levy heavy penalties against employers that fail to do so.
Because of this, lawsuits for noncompliant wage statements have increased dramatically in California. State lawmakers have made it easy for employees to file lawsuits under the California Private Attorneys General Act (PAGA).
According to California Labor Code Section 226, you must provide a pay stub as a detachable part of a check when you pay workers. If not, you must provide employees with a separate written document, for example, when you pay employees with a personal check or cash. Either way, you must document:
Total hours worked by nonexempt workers
Piece rate, if applicable
The pay stub must also have the name of the employee and the last four digits of their Social Security number or an employee identification number.
Important Info for Employers
Remember, never list an employee's full Social Security number on their paycheck stub. Also, your pay stubs must include the legal address of your business and whether your business contracts farm labor, as well as the type of legal entity under which you operate.
Other important items that you must include on pay stubs are all hourly rates that affect the pay period for that stub. You must also provide the previously mentioned information on the pay stubs of temporary workers.
In addition, Labor Code Section 246 mandates that pay stubs include the amount of available paid time off (PTO) that you provide for your employees in place of sick leave. If, for instance, you provide your workers with unlimited PTO, you must state that on the pay stub. Another section of the labor code mandates that you also include any compensable rest and recovery periods on employee pay stubs.
Difference Between Pay Stub vs Pay Statement
When it comes to employee pay, the right documentation makes a huge difference. For example, one employee sued their job for failing to include accrued vacation pay on their wage statement. The courts, however, dismissed the lawsuit because it was not necessary to include this information on the pay statement unless a payment was due at the conclusion of employee's role.
Section 226 also doesn't require employers to specify the hourly rate associated with payment to a union vacation trust fund. It's also helpful to know that vacation and PTO are treated similarly-as vested wages. Still, you must pay out unused vacation or PTO upon termination of employment in California.
Wage statement requirements vary by state. In California, for instance, section 226 mandates that you provide employees with an accurate itemized statement. The statement might include gross wages and total hours worked. You also need to include information about piecework. Additionally, you'll need to include information about deductions, net wages and pay period on workers' pay stubs.
In the state, you must also include the last four digits of the employee's Social Security number or the identification number. In addition, you must include the name and address of your business which employs the worker. You must also include the hourly rates that affect each employees' pay. If you fail to comply with these California regulations, employees are entitled to recover damages.
Why Are Statement Different from Stubs?
When tax time comes, many people wonder why pay stub wage amounts differ from what shows up on their W-2. Resolving this issue can prove confusing. To begin with, pay stubs are different from W-2s.
In some instances, you may have to include nontaxable income items on your employees' W-2s-which would make their yearly income differ from that of their pay stubs. Some of your employees may also participate in a retirement plan which reduces their taxable federal and state wages.
Also, an employee's gross yearly income may look different if your company provides health insurance payments via pretax deduction.
What Is a Stub Number? and Other Vital Facts
A stub number is a record-keeping number that your accounting department uses to keep track of employee pay stubs. Each pay stub has a unique number.
The unique number makes it easier for accountants to track down pay stubs when, for instance, they need to figure out which deductions were taken out before taxes-such as those for insurance or 401(k) plans. In this instance, the accountants need to deduct gross wages before deducting taxes.
Next, they count other needed deductions, such as employee donations and garnishments. Still, employees are obligated to pay taxes on those deductions. At the same time, the employee may be able to take deductions on their personal income tax. For both your company and employees, it's important to keep track of regular pay, overtime, sick time and vacation pay. For all stakeholders, these amounts can have varying tax benefits.
It's also important for you to track current and year-to-date pay stub information. In the beginning, it's easy to track year-to-date pay. For instance, an employee's first paycheck is the same as their yearly pay, at least for that pay period.
You must also remember to pay into employees' FICA and Medicare benefits. Some businesses list the taxes that they pay for employees. You need to check with your local and state tax authorities to find out what deductions the law may require you to track.
In California, for instance, you do not need to list accrued vacation until workers are no longer in your employ. At the same time, California Labor Code Section 246 requires that you list the amount of accumulated PTO on each pay stub.
At some point, employees may need their paystub information for things such as loans or public assistance. Pay stubs are essential for helping them keep track of their hours, budget and expenses. They also help you by ensuring that the information you have about your workers is accurate.
Some employers add a statement on pay stubs informing employees that it's their responsibility to notify human resources if there any important changes in their background. For instance, you might require employees to inform human resources about address changes or withholding information. This practice is a great way to prove that you've fulfilled your legal obligation in the event that something goes wrong.
Creating Pay Stubs Like a Boss
Sometimes, it's hard to fit everything you need onto a paystub. Because of this, many employers use abbreviations. For example:
Current - pay period earnings
Gross - earnings before deductions
HOL - holiday pay
Net - earnings after deductions
OT - overtime
REG - regular hours
VAC - vacation pay
YTD - year-to-date
You might also use 401(k) or RET for tax-deferred retirement contributions. Some employers use the word "Garnish" to indicate when a garnishment is deducted from an employee's paycheck.
What Is a Wage Statement?: Tips for Tax Time
Each year, you must prepare a W-2 statement for each employee. The statement must show employees' total gross earnings, the Social Security earnings, the Medicare earnings and their federal estate taxes that you withheld during the year.
The reason that you must do that is because employees need to include this information on their income tax forms. It's also a way for the Social Security Administration and the IRS to verify your workers' income tax returns.
As an employer, you have two critical responsibilities when it comes to W-2s. You must provide a W-2 to employees by the end of January of the year following the tax year. You must also forward all employee W-2s to the Social Security Administration on the same date. It helps to provide employees with this information early so that you can find and fix errors before everyone needs to file their income tax returns.
A W-2 is a multipart form. You must forward Copy A to the Social Security Administration. You must also send Copy 1 to the appropriate city, state or municipality. Copy B is for the employee's federal taxes. Copy C is for the employee's personal records. Copy 2 is a duplicate for the appropriate city, state or municipality. You'll keep Copy D for your own records.
It's important to note that you can't download a W-2 form from the internet. For example, Copy A is printed on special paper. Therefore, you must use official forms. You can acquire official forms from a copy shop, some tax software programs or your accountant.
Getting Your Pay Statements Right the First Time
An easy to use, online pay statement generator can help you fill, submit, download and print payment documentation quickly. For instance, online pay stub makers are designed by professional accountants. They deliver accurate calculations instantly. There's typically no subscription fee and no software to download.
Creating a pay stub is straightforward and hassle-free. Best of all, top online pay stub makers enable you to create the perfect template for your business. Now that you've learned how to make professional pay stubs for your business, browse more here on Franchise Herald to learn more great info about running your franchise the right way from the beginning.
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