How an Employee's Pay Stub Is Created and Used
An employee pay stub is a record of how an employee's pay is calculated, for each pay period during the year, with a running year-to-date total.
The employee pay stub includes the following information and calculations for each paycheck.
- First, the gross pay is calculated, for hourly and for salaried employees.
- Then, the federal, state and local withholding taxes are calculated, based on the gross pay amount. The federal income tax amount is calculated based on the employee's W-4 form.
- The FICA tax deductions (social security and Medicare) are calculated, based on gross pay.
- Other voluntary deductions are included.
- All withholding and deductions are totaled.
- Net pay is calculated, as gross pay minus total withholding and deductions.
Example of an Employee Pay Stub
This is an example of one pay period's pay stub for one employee. The withholding amounts are totaled. The net pay is the gross pay minus total withholding.
Employee Pay Stub Example
|Federal Income Tax Withheld||170.00|
|State Income Tax Withheld||65.02|
|FICA Tax Withheld||25.99|
How the Pay Stub Is Used
The information on the employee pay stub has several purposes:
- The primary purpose of this record is to calculate the employee's net pay as shown on their paycheck.
- The pay stub is given to the employee as part of a paycheck to demonstrate how the calculations were done, in case the employee has questions.
- The record is used to keep track of all employee earnings for the year, in order to prepare the W-2 form—the annual wage and tax statement given to the employee after year-end.
- The totals for all employees for the pay period, for federal, state, end FICA tax withholding, are entered into payable accounts, for reporting purposes for Form 941, the quarterly employer's report.
- The payable account for FICA taxes is also added to by the employer's contribution., which matches the employee's withholding. So, in the example above, both the employee and the employer owe $65.02 for this pay period.
- The combined total of the employee withholding for income taxes and FICA taxes, plus the employer's contribution to FICA taxes, is calculated and sent to the IRS.
- The totals for FICA withholding are monitored, to be sure that the Social Security portion is stopped when the employee reaches the Social Security maximum for the year.
- The gross pay is monitored to include an additional Medicare tax if the employee's gross pay goes over a specific amount.
Other Items That May Be Included
- Name, address, and Social Security number of the employee
- Employee marital status and number of exemptions (from Form W-4), for the purpose of calculating federal income tax withholding
- Deductions for voluntary contributions by employees to employee health plans
- Deductions for employee contributions to 401(k) or 403(b) plans
- Records of fringe benefits paid to employees, and how their value was determined
- Dates of employment for each employee
- Special payments such as sick pay, lump-sum leave payments, disability pay, and life insurance payments
- Reimbursements for employee travel expenses or meals, entertainment, and other per diem expenditures
- Reimbursement for employee use of a personal vehicle for business purposes
All payments to employees and employee benefits must be categorized on the employee's pay stub so that they can be recorded correctly for tax purposes on Form W-2.