How to Make a Pay Stub

What is a pay stub?

A pay stub is a financial record of an employee’s paycheck and deductions. A pay stub shows an employee’s gross income during a specific pay period, including wages, commissions, bonuses and tips. Pay stubs also list itemized withholdings for taxes, such as Medicare and Social Security (FICA), and deductions for items like health insurance premiums and employer-sponsored retirement plans. [Read related: How Many Pay Periods Are in a Year?]

A pay stub serves as a payment receipt for the employer. It’s also a record of how much was withheld from each employee’s paycheck and for what purpose. Historically, pay stubs were attached to employees’ physical paychecks, which is how they got their name. Now, pay stubs are usually digital, and for employers that use paperless payroll or a payroll service, pay stubs are available online to download when needed.

Dana Ronald, founder of Tax Crisis Institute, said payroll software makes it easier to generate accurate pay stubs. 

“Payroll software is designed to handle various tax codes and automatically update any changes in legislation, keeping your records precise,” he said. “As the industry moves toward digital solutions, the efficiency of payroll management has significantly improved. However, businesses must employ robust cybersecurity measures to protect sensitive employee information when transitioning to online pay stub systems.”

Although federal law does not require employers to provide employees with pay stubs, they’re an essential part of payroll accounting and distributing them is considered a payroll accounting best practice.

How to make pay stubs for employees

The easiest and most accurate way to make pay stubs for employees is to use one of the best payroll services, accounting or payroll software, or a pay stub generator. 

“When everything used to be manual and physical, the pay process would take up time, be riddled in errors and overall, be a more painstaking process,” said Mark Wilkinson, co-founder and chief financial officer of TileCloud. “By digitalizing the process, everything is more streamlined. There is less paperwork, things take less time and you don’t have to worry about making mistakes in calculations (at least, not as often).”

Although it’s possible to generate pay stubs manually, it’s not necessary thanks to payroll software. But if you want to create pay stubs manually for W-2 employees, here’s the process:

1. Start with the employee’s total gross pay for the pay period.
2. Add deductions for taxes withheld (federal, state and local if applicable, as well as FICA).
3. Deduct the employee-paid portion of health insurance premiums.
4. Deduct employee-elected retirement plan contributions.
5. Add any other deductions (such as for other insurance coverage).
6. Calculate net pay (the amount that goes on the employee’s paycheck).

After you generate a pay stub for an employee for a given pay period, attach that pay stub to the check (if you’re issuing a physical check). Optionally, provide pay stubs digitally by email or through an online portal.

It’s much easier for small business owners to use payroll software or a payroll service, which will automatically calculate employee pay and deductions and withhold the appropriate amounts. These options also create pay stubs automatically and make them available digitally through an employee portal.

“Manual pay stubs can be a bit of a nuisance, often resulting in errors and overall taking more time,” Wilkinson said. “If you go for payroll software instead, the whole process can be automated — making it easier for tax calculations, wage deductions and recordkeeping. Overall, software will minimize errors and make it easier to comply with regulations.”

What is included in a pay stub?

Pay stubs break down an employee’s income for a given pay period. They start with an employee’s total gross pay for the pay period. They also include notes for amounts withheld for items such as taxes and employee-elected deductions for health insurance premiums and retirement plans, like a 401(k) plan. [Learn the difference between net and gross income.]

Here are some items that appear on a pay stub:

• Gross wages: Gross wages are the amount the employee earned for the covered pay period, whether based on an annual salary, an hourly rate or another arrangement. [Read related: Salary vs. Hourly: What’s Better For Your Business?]
  
• Commissions and bonuses: A pay stub includes any additional payments (besides reimbursements) from the employer to the employee, such as commissions and bonuses. [Learn how to calculate bonus taxes.]
  
• Taxes: Any federal, state or local taxes withheld from an employee’s check, including those for Medicare and Social Security, are also reflected on a pay stub (and itemized).
• Health insurance premiums: If you offer health insurance to your employees, any employee payments toward health benefits are included as deductions against the employee’s gross pay.
• Retirement plan contributions: Contributions to a 401(k), SIMPLE IRA or other employer-sponsored plan are also included if the employee elects such deductions.

Pay stubs may include tips or bonuses paid by the company, but they don’t include tips that customers pay directly. 

Why are pay stubs important?

Creating pay stubs is an essential part of processing payroll because they serve as receipts of payment. They verify that taxes, as well as employee deductions for health benefits and retirement plan contributions, were withheld as required for a given pay period. These can be calculated easily with payroll software. [Follow these eight easy steps to process your payroll.] 

“One of the best things about payroll software is that it will update the tax rates and deductions depending on [applicable] laws,” Wilkinson said. “This means that pay slips will be accurate and have the correct withholdings for employees and independent contractors.”

Pay stubs are important to employees because they show the details of their pay. Pay stubs also represent proof of payment, which is important when the employee wants to get a loan. Most mortgage lenders request at least one or two months of pay stubs.

“Employees can get access to their pay details in real time with nice features, as the businesses can offer access seekers secure online facilities,” said Steven Templeton, founder of Templeton & Company and PracticePro 365.

Who should employers create pay stubs for?

Although federal law doesn’t require employers to generate pay stubs, it’s important to create them for all employees. As the business owner, you should also create pay stubs for yourself if you pay yourself a salary. These pay stubs provide proof of gross wages and deductions for taxes and other items; they’re essential if you or your employees want to get a mortgage.

However, it’s important to note that if you own a company that’s set up as a limited liability company (LLC) and taxed as a partnership, there’s no such thing as salary. Any money paid to owners is considered a profit distribution, and pay stubs probably aren’t necessary. [Read related article: Which LLC Taxes Must Your Business File?]

Before you create your own pay stub, figure out the proper deductions for your W-2 employees and independent contractors.

“Clarifying different tax treatments is crucial when dealing with W-2 employees and independent contractors,” Ronald said. “Each type of worker has distinct considerations for deductions and reporting. Be sure that the software you use can accommodate these differences and generate accurate documentation for each category.”

The right payroll software can help you differentiate full-time employees, part-time employees and 1099 independent contractors.

“The software also understands that W-2 employees differ in some ways from 1099 contractors, hence generates payrolls that have the correct deductions in relation to the type of worker,” Templeton said. “This allows for service diversity while ensuring that the required laws are adhered to by these employers.”

Some apps also have error-screening options for different types of workers, Templeton added.

Should you make your own pay stubs?

If you want to create your own pay stubs, there are numerous pay stub generators and templates online to help you do it. Templates are available for Excel and Word and vary by state and employee type.

However, using a template or other tools to generate pay stubs yourself also requires you to stay current on federal and state tax brackets and rates, employment tax rates, and other policies regarding withholding and deductions. You’ll need all of this information to calculate each employee’s itemized deductions and withholdings accurately and to issue correct net pay amounts. 

If you use payroll software, it handles all of this for you. “Payroll apps are seamlessly updated based on the ever-evolving federal and state tax laws,” Templeton said. “This ensures that there is no room [for] error when it comes to withholdings, deductions and contributions. Therefore, there is little or no risk of incurring any penalties or audits.”

In addition to being an error-prone process, creating your own pay stubs can be tedious and time-consuming. Digital methods, by contrast, streamline the process.

“The use of digital pay stubs also improves payroll operations, thereby reducing the time taken to process payroll cycles and eliminating the use of papers,” Templeton said. “Use of key access lots and multifactor authentication are equally vital in ensuring that the sensitive information remains secure.”

For these reasons, it’s usually much easier to choose a payroll service or payroll software to handle pay stub creation.

Simplify payroll with the right tools

Although it’s possible to generate pay stubs manually, it can be time-consuming and prone to error, especially with the complexities of tax laws and deductions. Payroll software streamlines this process by automatically calculating wages, taxes and deductions, thereby ensuring accuracy and compliance. These tools can save time and reduce the risk of mistakes that could lead to penalties or audits.

Ultimately, payroll software can be a great investment for small businesses. It makes payroll management easier and more secure while providing employees with the needed pay stubs. 

Amanda Clark contributed to this article.