What Is a Paycheck?

How Does It Help You?

The direct deposit slip is evidence that an employee was paid with a paycheck.
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A paycheck is a check issued by an employer in order to satisfy the compensation commitment the employer made with the employee when the employee was hired. The paycheck is most frequently issued every two weeks, occasionally weekly or monthly.

Salaried or exempt employees generally receive 26 paychecks a year with the compensation paid in equal installments. In an all salaried organization, time recording or time clocks are rarely required.

The assumption is that every employee is earning the salary that they are paid. 

Organizations with exempt and nonexempt employees generally require employees to turn in time cards to assist payroll accounting to track employees' time. Exempt employees turn in 40 hours less any paid time off. Non-exempt employees, who are often asked to punch a time clock, turn in the exact hours worked so overtime is fairly paid according to the FLSA.

Payroll Withholding

In issuing the paycheck to an employee, the employer is legally required to withhold a certain percentage of the compensation to pay income tax and social security. The employer regularly sends the dollars withheld, and additional social security paid by the employer, to the I.R.S. This gives the I.R.S. an accounting of what you were paid and how much money was withheld.

When tax time rolls around, the I.R.S. can check your tax return against the records it received from your employer.

 

The employer may withhold additional amounts of money from the paycheck when the employee is required to pay for a portion of the benefits plan such as part of the cost of health insurance. Additionally, employers must withhold wages to comply with wage garnishment ordered by a court to pay an employee’s unpaid debts such as alimony and child support.

Paycheck Stub Purpose and Contents

A paycheck stub, which is also known as a pay stub, pay slip, or earnings statement, is the part of the paycheck that documents how much money employees were paid. It is usually attached to the employee paycheck with a perforated, easy to tear off page.

When the employee deposits or cashes the paycheck, he or she can easily tear off the paycheck stub for personal recordkeeping  purposes. Paycheck stubs provide the details of the employee's pay and the deductions from the pay that were made during each pay period for the year.

Payroll deductions depend on the circumstances of the individual employee and the employer's benefits offerings. The following information is available on paycheck stubs or electronically.

  • Starting date and ending date of the pay period
  • Gross pay (The amount of money the employee was paid before the employer took deductions.)
  • Net pay (The amount of money the employee receives after the employer takes out deductions.)
  • Federal taxes withheld
  • State taxes withheld
  • Local taxes withheld (If existing - many local areas do  not charge taxes.)
  • Insurance deductions
  • Medicare deduction
  • Social Security deduction
  • Retirement. pension, or 401(k) plan contribution
  • Wage garnishments

The paycheck stub may also include information such as year to date totals of gross and net wages and deductions.

Paycheck as a Communication Tool

Many employers use the paycheck as a communication tool. The paycheck stub often tells the employee how much vacation time, sick time, or paid time off (PTO) was accrued during that pay period. The paycheck may offer a cumulative accounting of time off used by the employee.

Traditionally, since the employee received his or her paycheck in an envelope, reminders, updates, and newsletters were regularly inserted in the paycheck envelope.

With the massive rise in electronic communication, this type of communication has become more challenging, since employers most frequently require that employees maintain an account into which the paycheck is directly deposited on each pay day.

Additionally, information that was communicated on the paycheck stub is now visible in your online account and at your internal benefits website. Few employers provide the paycheck stub in an envelope anymore although some employers did initially as they made the transition to the online world. 

Many organizations use a third party vendor, such as ADP, to process employee paychecks. Employees have access to their records at the third party website. The third party processor is an expert at producing paychecks so this function is often outsourced.

Paycheck Garnishment

Garnishment is the process of taking money from an employee's paycheck to pay off a debt that the employee owes. The garnishment is usually the result of a court order or a tax collection. The employer is required to cooperate with a wage garnishment order.

In garnishment, the employee has the money owed deducted from his or her paycheck until the debt is paid off or until the employee makes other arrangements to pay off the debt. Certain limitations on garnishment exist.

For example, unless there are exceptional circumstances, 50% of the employee's paycheck is the limit for garnishment for child support if the employee has another spouse or child to support. Without a spouse or another child, the limit is raised to 60% and another 5% can be deducted for back payments. Here are more details about garnishment amounts and percentages.

Various states have their own guidelines for wage garnishment. These guidelines may limit the reasons for which an employee's wage may be garnished.

They may stipulate a different maximum garnishment than the Federal law. They may exempt employees from garnishment because of certain responsibilities for child support and other restrictions.

Because employers must follow legal guidelines in garnishment, employers must know the laws in their state about garnishment. Because employers are often faced with multiple garnishment orders for a particular employee, knowing the maximum amount that can be deducted from an employee's wages is critical. Knowing the order in which creditors must be paid is important, too.

For example, if an employee was experiencing garnishment for Federal taxes, state taxes, and credit card debt, the employer would pay in that order until the maximum percentage was reached.

Garnishment most frequently occurs for unpaid but owed:

  • child support,
  • student loans, and
  • Federal, state, and local taxes.

An employer is informed of garnishment requirements by the arrival of a legal document or court order with deadlines stipulated for garnishment. As a courtesy, I recommend letting the employee know that you have received a garnishment order. This allows the employee to know prior to the receipt of a reduced amount of compensation in his or her paycheck.