What is The Importance Of Keeping Your Pay Stub?
Every other week, fortnight, or month, you receive your pay stub, either in hard or soft copy format. But then, you ask yourself whether it’s worthwhile to keep your pay stubs or discard them altogether.
At the get-go, it’s advisable to keep them for some time, as they’re useful in several ways. Before listing the benefits, you’d want to know the contents of a typical paycheck stub. Then, you can understand why it’s important to keep them.
What’s contained in paycheck stubs?
A paycheck stub refers to that portion of your paycheck that gives finer details about your salary. You understand that you don’t take home the gross salary as it is. Usually, several deductions are made, and you remain with a net pay that’s less than the gross.
These are some of the details outlined in pay stubs, and here’s a summarized breakdown of the contents:
Employer information: Including name of the company, physical and postal address, and Employer Identification Number
Employee details: Including full names, postal and physical address, and Social Security Number.
Pay period and schedule: This can be weekly, fortnightly, monthly, and more, depending on the agreement with your employer.
Gross income: The total amount you worked for before deductions come in.
Deductions: Includes federal income tax, state tax, social security contributions, FICA medicare tax, state unemployment tax, state disability insurance, paid family leave, among several others.
Net pay: Your take-home payment after the deductions from the gross pay.
Other details: Your employer may have other items to capture on the pay stub, like retirement plan contributions, health benefits, vacation wages, and so on.
With the above in mind, here’s why you should keep your pay stubs as an employee:
1. Loan application
Lenders usually want some degree of guarantee that you’ll be able to repay your current debts as well as the new loan you’re applying for. That’s why they ask for proof of income. They accept documents like tax returns forms, W-2s, 1099s, bank statements, employer contact information, and check stubs.
Indeed, some of them prefer pay stubs over other proof of income documents. This must be because paycheck stubs show the exact payments coming from your employer. A letter from your employer may not be as effective.
So, you better keep the check stubs if you’re looking to apply for a loan someday. And please don’t imagine that you’ll never need a loan. Investments like cars, houses and new businesses usually require a huge capital outlay, for which your savings may not suffice. In that case, taking a loan might be the best way to make such investments.
2. Renting a house
It’s no news for tenants to default paying rent. A 2020 study revealed a spike in rental arrears as 300,000 renters in the UK failed to pay their rent on time. Perhaps you’d argue that this was due to the COVID-inspired financial crisis.
But landlords have had their fair share of disappointments with tenants over the years, and most of them can’t risk taking in someone whose financial standing isn’t sound. That’s why they require proof of income, at least to have some level of assurance that the tenant won’t default in paying rent.
So, keeping your pay stubs will prove worthwhile when you go looking for a house to rent. Like loans, landlords can also accept other proof of income documents, but most prefer check stubs.
3. Proof of prior employment
Research indicates that about 78% of job seekers lie during the hiring process. Amongst the things they lie about is their past employment. And so, you wouldn’t expect employers to lower their guard when doing interviews.
One document they rely on as proof of past employment is the pay stubs. Some may want you to provide as many as for a whole year or even several years. They know for sure that it’s challenging to fake these, unlike a letter from your supposed prior employer, which is very easy to duplicate.
Thus, keeping your pay stubs intact improves your chances of getting hired when you go job hunting. The fact that you have them also portrays that you’re an organized person with excellent record management skills, which is an added advantage.
4. Identifying paycheck errors
With reports that 82 million US workers have experienced paycheck errors at one time or another in their careers, you’d want to be extra cautious lest you become a victim too. Please understand that the persons responsible for payroll preparation are human. And to be human is to err.
A simple mistake like misplacing a decimal can significantly affect your take-home pay. For instance, a deduction of 1.32% may be calculated as 13.2% and reduce your net pay by a big margin.
If the payroll department fails to identify the error, it’s usually up to you to make a complaint. So, always make a point of keeping your check stubs and going over every detail right upon receiving the stub. You worked for the money, and you deserve your rightful earnings.
5. Filing tax returns
If you have a regular job, your employer should provide you with Form W-2 once the tax year comes to a close. This form has information regarding how much money you were paid and how much was withheld for tax purposes. You can compare the figures in this form with those in your pay stubs before transferring the details to the tax return forms. This way, the Internal Revenue Service (IRS) determines how much taxes you owe the government or how much refund you should get.
It will help if you strive to fill the tax forms correctly. Mistakes in your earnings could mean that you get taxed at a higher income bracket than you currently are, which only drains you more financially. Also, your records have to be accurate for you to be eligible for returns.
If you get involved in a motor car accident or vaccine injury that strips off your ability to work, you usually need compensation from the culprit. The amount of money you get isn’t just a random figure.
The authorities have to know how much you have been earning in the past, which will help them calculate the losses you’ll make in the coming months or years by not working. Providing your pay stubs is a sure proof of your income, thus making the compensation process easier and faster.
Benefits for employers
The above six benefits have revolved around the employees. If you’re an employer, you also need to keep copies of the pay stubs that you give to your workers after every pay period.
Here’s how keeping them benefits you:
1. Legal compliance
It’s a legal requirement for employers to keep company records for several years, depending on the type of record and other local laws. These records include:
Employee details, including monthly payments, leave days, hours of work per day, week, or month, and more.
Reimbursement of work-related expenses
Amount contributed towards superannuation
Employee compensation insurance details
Rosters and timesheets
Time after time, in case an issue arises concerning a particular employee, the government would want to access these records. Failure to present them means you’ve broken the employment laws, and therefore you risk getting fined or imprisoned.
2. Employee complaints
When a certain employee is dissatisfied with their salary, perhaps due to what they claim is an error in the calculation of their net pay, you need the paycheck stubs to be able to verify their claims. Without your copy, you wouldn’t know whether they’ve subtly altered their paychecks just to defraud you. But with your copy, you can quickly confirm whether or not their allegations are true.
By having proper financial records, your business won’t struggle that much when tax season comes. You’ll have all details at hand, meaning filling the tax forms will be quite straightforward.
Also read: Payroll Tax Vs Income Tax - The Ultimate Guide
How long to keep pay stubs
It’s advisable for employees to keep pay stubs for at least one year. Once you fill the tax forms and file for returns, you’re free to discard the documents. Ensure you use a paper shredder to avoid situations where malicious persons get hold of sensitive information contained therein and use it to defraud you.
Alternatively, you can have a cloud-based archive of all your pay stubs. In this case, you don’t have to discard any pay stubs, as you can keep as many as you want, even with relatively small storage space.
For employers, the recommended storage duration of pay stubs is at least three years, or as long as the local laws stipulate.
The Bottom Line
Keeping pay stubs is a sure way of having proof of income for those activities that demand such, for example, loan applications and renting houses. Plus, this document can help you file taxes correctly when the time comes.
They also serve as evidence whenever you have a pay dispute or a compensation claim. So, please make a point of keeping your pay stubs and not discarding them once you read the contents.
Also read: Why Pay Stubs Are Important At Tax Time