When the entrepreneur and Muppeteer Jim Henson made his first dollar, he framed it and hung it on the wall of his office. For everyone, whether you are the owner of the business or an employee, earning income is a source of pride and a vital foundation of economic security.
Surprisingly, despite the importance of getting paid, most people do not understand the fundamentals of payroll, including what is removed or added to a paycheck.
What is a pay check?
There is hardly any news that, given recent changes to tax laws, the Internal Revenue Service (IRS) recommends that everyone should do a payroll. Ever heard of the restraint calculator from the IRS?
Moreover, what is an amount of withholding? What is the difference between a pay check and a check stub? And who is this FICA person anyway? *
Why Know How to Read a Paycheck Is So Important?
Paying bills to retain esteemed workers, pay checks are important for employers and employees.
- 71% of Americans say that a late payment would make it very difficult or difficult to pay their bills.
- 24% will look for a new job after a single salary error.
- 42% say that articles, such as taxes and deductions, are hard to understand.
- 26% will turn to a manager for help if there is a mistake.
Paycheck vs. pay stub – Is there a difference?
Yes, there is. A paycheck is a physical check, while a check stub is a document that summarizes the amounts of a paycheck. As direct deposit is becoming more common, an employee is more likely to receive an email with a link to pay for the details of the stub as compared to a paper check.
What are the most basic details of a paycheck stub?
Although there is no specific stone format. There is standard information that is included no matter how a check stub is designed.
Some of the most basic details include:
- Addresses of employers and employees – both should be up-to-date and accurate.
- The pay date – the date of issue of the pay check.
- Pay Period – The dates covered by the pay check.
- Rate of Pay – how much the individual is paid per hour or year.
What is the difference between total wages (gross wages) and net wages (final pay)?
This is really the crux of why a pay stub is provided to employees. The total salary is the amount of the pay check before all taxes or other deductions are withdrawn or contributions are added. The net pay is the last amount that the employee takes home.
What are the deductions and what is levied on a payroll?
The verb to infer means to subtract or to remove. The income tax is the deduction that everyone knows best. As part of the payroll issue, employers (businesses) must subtract (retain) a percentage of each employee's taxable pay. This is done each time the payroll is executed.
Remember who FICA was?
FICA is actually the Federal Insurance Contributions Act, which is also responsible for two other deductions – Medicare and Social Security.
In payroll, things like income tax, health insurance and social security are called payroll taxes (labor taxes). Other deductions may include national and local income tax, 401K employee contributions, insurance payments, profit sharing, union dues and garnishments. (In Alaska, New Jersey and Pennsylvania, employees also have deductions for state unemployment insurance.)
What are the contributions and what is added to a pay check?
Contribute means add. With respect to payroll, employees are not the only ones who have to pay taxes. Employers also contribute to social security and health insurance. In addition, they are also responsible for unemployment insurance at the federal and state levels.
Other dues may also include other income, such as overtime, tips, bonuses, commissions and expenses or paid vacation such as sick leave, personal leave or vacation. All types of income (income) represented by contributions are considered taxable (subject to income and / or social charges such as health insurance and social security).
What is the difference between the total amount and the cumulative amount since the start of a pay?
Depending on how the paycheck stub is formatted, you can see numbers for the total and cumulative amounts since the beginning of the year. When you see these numbers, the total is the total amount of the pay check, and the total of the year is the total since the beginning of the tax year for your payroll.
What happens to payroll taxes that the employer withdraws or adds to a payroll?
Money for federal and state income tax, health insurance, social security and federal unemployment payments are all sent to the federal government. IRS. According to several factors, funds are deposited on a weekly, monthly, annual or overnight basis.
National and local taxes are transmitted and reported to the relevant national and local tax authorities. The automation of this process of filing and reporting payroll taxes is one of the main reasons why companies use payroll software.
How is a pay check or pay stub linked to a W-2?
A W-2 Statement, Wages and Taxes, is issued at the end of the year as a legal tax document. It summarizes all the information on the paychecks of the year in one document. Employers send a copy to the IRS and employees use their copies to file their tax return.
- The W-2s are due to the Social Security Administration (SSA) and to the employees on January 31st of each year.
- Amounts in a W-2 must match the last pay stub of the year employee.
Whenever an employee receives a pay check, he or she must review the pay check stub and ask questions if something does not make sense or is perhaps to be incorrect.
The longer the error, the greater the potential tax and financial implications. For example, if the withholding tax deduction is not high enough, the employee will face a larger personal income tax bill. Or, if the employer does not contribute payroll tax amounts, it will cost more to repair the longer, it goes unnoticed. (Think of fines and compound interest.)
With regard to record keeping, employees should keep their paycheck stubs for about a year and the W-2's (in support of income tax documents ) should be kept for at least three years. The standards for employers are harder to define because of the many labor and tax laws involved. The IRS recommends that employers keep payroll tax records for a minimum of four years. However, since payroll records affect so many areas of compliance, employers should be sure to check all applicable guidelines.
The Main Course – Everyone Should Read Their Pay Heels
Whether you receive a paper or electronic pay stub, everyone – employees and employers – should take the time to check this information regularly. Employers work hard to pay their employees and employees work hard to earn their wages. Use this new knowledge to avoid mistakes and better understand where your money is going.
Useful Links and Resources
For more information, see these sources:
American Payroll Association – 2017 Paid in the American Inquiry
Bank of America – Best Money Habits Blog
IRS – Tax Center for Small Businesses and Workers Independents
Kronos Workforce Institute – 2017 Part I
Kronos Workforce Institute – 2017 Engaging Employees in the Payroll Investigation, Part II
Wagepoint Interactive State Taxing Card by State
Wagepoint United States Guide to the Payroll Tax and Computer Graphics
The advice we share on our blog is intended to be informative. It does not replace the expertise of accredited professionals.
Author: : Blogmaster, content creator and marketing guru entering Wagepoint, Michelle Mire likes to simplify the subjects of Pay complex and generate articles with practical tips for small businesses and startups. When she's not on the keyboard, she likes chocolate, racing and TV quality (not always in that order).