Why Are Pay Stubs So Important At Tax Time?

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As the tax season fast approaches, you might be in a state of panic, as most other Americans are. Indeed, a recent study indicates that 54% of U.S. citizens dread filing their taxes. This could perhaps be due to the usual challenges of filing taxes, including the ever-changing tax laws, inadequate training on tax codes, confusion on the correct form to use, failure to distinguish taxable and non-taxable income, incorrect calculations, delay of mailed tax forms, and tight deadlines, among others. 

Fortunately, there are ways for you to make the tax filing process more manageable if you’re one of the taxable individuals. One of them is by using pay stubs to your advantage during the tax season. In this article, you’ll get to learn about the importance of pay stubs at tax time. But first, a recap of the basics.

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Table Of Contents
 

 

What are pay stubs?

If you’re employed and periodically receive a paycheck, you must have noticed that your pay stub comes in two parts. The first section is the one you take to the bank as a check deposit. 

The second part, also known as a paycheck stub, contains a comprehensive breakdown of your earnings. It includes the following critical information:

  • Gross earnings: This is the total amount of money you worked for before making any deductions

  • Pay period: This is the extent of time you worked to earn the amount in the current paycheck. It’s usually stated as the start date to end date. 

  • Employer information: This includes the company name, employer identification number, physical location, and postal address.

  • Employer data: This includes your full name, postal address, area of residence, and social security number.

  • Tax deductions: This includes federal income tax, state/local tax, FICA tax, Medicare tax, state unemployment tax, and state disability insurance, among others.

  • Other deductions: Contributions to an individual retirement account (IRA) and various health insurance plans are listed here.

  • Net earnings: This is the balance you take home after making the various deductions on your gross pay.

 

How do paycheck stubs help at tax time? 

With the above details in mind, you can now understand the importance of pay stubs when filing taxes. The two major ones are:

  1. Confirming the accuracy of the W2 form

  2. Filing taxes in the absence of the W2 form

Below is a detailed discussion of these two points.

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  1. Confirming the accuracy of the W2 form

The law requires every employer that pays USD$600 or more annually for work done by an employee to file Form W2 for each worker by January 31st after the tax year.  

This form contains the following information

  • Business information: This includes Employer Identification Number, business name, address, and state tax ID number

  • Employer information: This includes your name, address, and Social Security number.

  • Employee Earnings: The employer must indicate your total wages for the past year, tip income, and other forms of remuneration.

  • Tax withholdings: This refers to the total amount of income withheld from the employee for purposes of tax.

  • Retirement plans: There’s a section on the form to indicate whether the employee takes part in any retirement plan.

  • Special benefits: Such as being a statutory employee. 

 

With this in mind, note that it’s common for the W2 forms you receive from your employer to be erroneous. You understand that humans are to err. Any document prepared by humans is prone to error. One costly mistake you may often encounter is the W2 form indicating higher earnings than what you actually got. That means that you’ll have to pay higher taxes. Undoubtedly, no one wants that.

To confirm whether the W2 form entries are correct, you can compare them with the information on your pay stubs. The year-to-date values of gross earnings, net pay, and tax withholdings of your last pay stub of the year should ideally match the information on the W2 form. If they don’t match, you can contact your employer and ask them to clarify the reason for the differences. 

Alternatively, you can report your issue to the IRS, stating that your W2 forms are inaccurate. If you take this route, do note that you’ll have to present all the pay stubs for the tax year to prove that the W2 is wrong. 

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Exceptions

In some cases, the W2 form might look different from your last pay stub. Generally, the pay stub shows your total earnings, whereas the W2 form shows the taxable earnings. Suppose your employer offers a pre-tax health insurance plan, and you subscribe to it. If that’s the case, your taxable wages become lower than your gross earnings. Thus, you expect the values in your last paycheck stub to differ from those in the W2 form.

The same is the case when you participate in a company-sponsored retirement plan, like the 401k, and when your gross earnings include non-taxable income, such as gifts, child support payments, reimbursement for mileage, allowances, worker’ compensation benefits, and per diems. 

 

  1. Filing taxes in the absence of the W-2 form

As earlier mentioned, the law requires your employer to send you Form W2 by the end of January after the tax year. Furthermore, the IRS allows an extra 15-day grace period to factor in inconveniences, like postal snarl-ups. But even so, there are instances when you’ll be unable to receive Form W2 on time. 

Another scenario is when you get an incorrect form W2. If any of these two predicaments befall you, the lawful option remaining is to fill form 4852

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Form 4852

The IRS insists that you must first attempt to get your correct form W2 from your employer. If you don’t get the form by the end of February, you can call the IRS at their specified hotline to ask for assistance. They usually require you to provide your full name, address, ZIP code, and phone number. Then, they call your employer to request them to send the missing form. If you don’t receive it in good time, they send you Form 4852 to fill instead of the W2

The following is an outline of the information you have to provide in form 4852:

  • Personal information: This includes your full name, social security number, and address.

  • The tax year in question, usually stated as ‘For the tax year ending December 31…,’ for which you have to fill in the year, say, 2021.

  • A confirmation that you were unable to obtain your form W2 or whether you received an incorrect one.

  • A confirmation that you notified the IRS of the delay or inaccuracy of form W2. 

  • Employer information: This includes the business name, address, ZIP code, and Tax Identification Number (TIN). You can get your employer’s TIN from the previous year’s W2 form. But if you don’t have any with you, you can directly ask your employer to give you the number or even your colleagues.

  • Earnings: This includes the normal wages, tips, social security wages, Medicare wages, and other compensation.

  • Withholdings: This includes federal income tax withheld, state income tax withheld, local income tax withheld, and social security tax withheld.

  • Explanation of earnings and withholdings: Just below the wages and taxes section, you’re required to explain how you determined the amounts you filled in. You’d want to be precise here and simply state that you obtained the figures from your last paycheck stub of the tax year in question.

  • Explanation of efforts to obtain form W2: The IRS leaves nothing to chance. Thus, you have to give a detailed account of how you went about hunting for your form W2 when you realized it wasn’t sent by your employer on time. It’s best to be as honest as possible in this section, lest you mix your words and end up being caught lying.

Without your paystubs, it would be difficult to provide the wages and taxes information. That’s why it’s critical to always keep your paycheck stubs for tax purposes.

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Bottomline

You now have a clear understanding of the importance of pay stubs at tax time. First and foremost, they help you ascertain that the entries in W2 form are accurate. This ensures that you don’t overpay taxes and get into financial strain, or even underpay taxes and rob the government of what’s rightfully theirs. Second, paycheck stubs come in handy when your W2 forms are delayed or the ones you received are inaccurate.

Therefore, it’s in your best interest to keep your pay stubs for about three years. That’s if you receive the paper-printed ones and you don’t want your files to overflow with old documents. But if you receive your pay stubs in soft copy, perhaps as PDF files, there’s no harm in archiving them for as many years as possible. After all, they take only small storage space. 

However, that’s not the only importance of pay stubs. Remember, they’re helpful proof of income when you want to borrow loans, get a credit card, sign up for an insurance plan, rent a house, or even buy a car in a higher purchase price plan. So, keep your pay stubs since they’re important documents.

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Why Are Pay Stubs So Important At Tax Time?
James Wilson

After graduating from McCombs School of Business in Texas, James joined ThePayStubs as a CPA to make sure the numbers we provide our clients are corre... Read More

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