Pay stubs are more than a record of employee earnings. They are vital documentation that helps businesses and workers track critical financial information.
For businesses, pay stubs are an important tool for maintaining accurate payroll records, bookkeeping, and tax reporting. For employees, pay stubs can serve as proof of income and offer insights that can help them manage their personal finances.
Here are tips to help employers and employees manage, store, and dispose of pay stubs.
Why Pay Stubs are Important
Pay stubs typically provide a detailed record of earnings and deductions for each employee. This helps employees understand their paychecks, prepare for tax filing, and check for inaccuracies. Employees also frequently use pay stubs as proof of employment when applying for loans, mortgages, or other financial assistance.
On the business side, pay stubs may be required by law but they can also help demonstrate compliance with labor and tax laws. They can be a crucial tool for audits and providing formal proof of employee compensation.
Accurate and easy-to-understand pay statements help foster transparency between employers and employees and help prevent wage disputes.
What is a Pay Stub
A paycheck stub, or wage statement, includes payroll information for the current pay period as well as year-to-date. State-specific requirements for the payroll information that should appear on a pay stub vary.
Depending on applicable legal requirements, employers may be able to provide these to workers in digital or printed formats. Some states require employers to secure employee’s consent to receive electronic pay stubs.
Earnings and Deductions
While requirements for the specific information that must be provided on a pay stub vary by jurisdiction, many pay stubs include information on:
- Pay period, including start and end dates.
- Pay rate and hours, such as regular and overtime, and the hours worked at each rate.
- Gross pay, the amount an employee earns before taxes or deductions.
- Employee taxes, such as federal income tax, Medicare and Social Security (known as FICA), state income taxes, and local income taxes, if applicable.
- Benefit deductions, like health insurance coverage or retirement savings plans.
- Employer taxes and contributions, including federal unemployment tax (FUTA) and state unemployment insurance (SUI). This section also includes any employer portion of employee health care premiums and employer contribution to retirement plans.
- Wage garnishments, which are court-ordered deductions for things like child support.
- Paid time off (PTO), showing details for vacation, sick, personal, or other days.
- Net pay, or take-home pay, which is the amount an employee receives after all taxes and deductions.
- Year-to-date totals for earnings, taxes and deductions.
Estimate and summarize payroll tax withholdings and deductions to compare gross pay and net pay with our free paycheck calculators.
Tax Filings
Employees may need their pay stubs, along with their W-2s, during tax season. These documents can provide detailed proof of income and withholdings. Pay stubs can help employees reconcile differences between their records and IRS tax forms.
Financial Management
Pay stubs are useful when employees apply for loans and mortgages. They serve as proof of consistent income and help show financial reliability to lenders.
For Employers: How to Organize Pay Stubs
Pay stubs help verify that employees are paid correctly. Retaining pay stubs is part of broader payroll record-keeping requirements. Other payroll records include timecards, tax filings, and benefits records.
Employers have specific responsibilities under federal and state laws when it comes to maintaining payroll records.
Proper retention of pay stubs and payroll records helps support accurate tax reporting and audit readiness.
There are several factors employers must consider in deciding how long to hold onto pay stubs including federal and state requirements and the type and size of their business.
Taking a comprehensive approach and consulting with payroll or tax professionals can help promote smooth payroll management.
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Federal Guidelines
Under federal law, employers must retain payroll records for at least three years. The Department of Labor developed resources outlining the requirements to help covered employers maintain their compliance with federal wage and hour laws.
The Internal Revenue Service (IRS) advises keeping employment tax records for a minimum of four years. Depending on your situation, it may be a good idea to keep some records for up to 7 years, according to the IRS.
State-Specific Regulations
State laws vary widely. Some states mirror federal requirements, while others may mandate longer retention for payroll documents, including pay stubs. Employers should familiarize themselves with state-specific regulations to help ensure compliance.
Understanding the rules in your state(s) is important. Failure to adhere to state guidelines could lead to fines or legal action.
Considerations for Businesses of Different Sizes
Large companies with more complex payroll systems may hold records longer than required under federal and state law. Small businesses, on the other hand, may benefit from more simplified record-keeping systems.
Regardless of size, all businesses should follow applicable legal requirements and prioritize secure and organized storage of pay stubs and payroll records.
Managing Pay Stubs Electronically
The choice between physical and digital storage may depend on applicable legal requirements in addition to a business’s resources and available space. Digital storage solutions can offer enhanced security and accessibility, helpful for businesses with limited space.
Electronic pay stubs provide employees and employers with quick access to information. This helps resolve questions and supports transparency in wage calculations and deductions.
Digital pay stubs also support environmental sustainability by reducing paper use.
Benefits of Digital Archiving
Digital archiving offers many benefits over traditional paper-based systems.
- Enhanced Security. Encryption technologies can protect sensitive payroll data and reduce the risk the data breaches.
- Better Physical Protection. Digital records are less prone to loss or damage from physical threats such as fire or water.
- Increased Collaboration. It’s often easier to access and share documents when they are stored electronically.
- Streamline Search. Finding and retrieving documents can be faster in a digital environment when you work with a system that offers search functions.
- Improved Productivity. All this improves speed and efficiency, which can lead to better productivity and lower administrative burden.
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What to do with Old Pay Stubs
Securely storing payroll records for the required time is important. You do not need to keep pay stubs forever. Once they’re no longer needed, disposing of them correctly is critical.
Old pay stubs can contain sensitive information, such as bank account details. This makes careful disposal essential to help prevent identity theft and data breaches. Timely disposal of pay stubs and other payroll records can also help businesses avoid unnecessary clutter and storage costs.
There are two main approaches to managing old pay stubs: physical shredding or digital disposal.
Shredding
If opting for shredding, the employer must ensure physical records are destroyed in a manner that ensures data confidentiality.
Regular shredders are not likely sufficient for the thorough destruction of sensitive data like pay stubs. A cross-cut shredder, which cuts paper into small pieces can be a better choice. A professional shredding service that offers secure document disposal is also a good option.
Digital Disposal
For businesses using digital storage, employers should ensure secure deletion protocols are followed. It’s not enough to simply delete files. Using specialized software that ensures data is not recoverable is crucial. These measures can help safeguard sensitive information against unauthorized access.
For Employees: How Long to Keep Pay Stubs
Workers also wonder how long to keep pay stubs.
The IRS suggests employees keep pay stubs at least until they have verified their W-2 forms and filed taxes for the year. This can help confirm earnings and tax withholdings match with official records. It’s wise to hold onto tax records for at least three years, according to the IRS.
Employees should be proactive in securely disposing of their pay stubs once they no longer need them.
Key Takeaways
For employers, best practices for maintaining and disposing of pay stubs include:
- Retain pay stubs and payroll records according to applicable federal and state-specific requirements.
- Stay up to date on federal and state-specific requirements for payroll record retention.
- Destroy physical records with a cross-cut shredder or use a professional shredding service.
- Securely delete digital records with specialized software to maintain data security.
For employees, best practices include:
- Retain pay stubs and other tax-related records for the time recommended by the IRS.
- Regularly compare pay stubs against W-2s and bank statements.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.