Summary: The paycheck (also called pay check) is the amount that an employee is paid each pay period, and should be accompanied by a paystub.
A paycheck is that delightful document that all employees look forward to, whether they get one every few weeks, every month, or on any other pay schedule. While the concept of paychecks is quite simple, processing and distributing them isn’t.
The best ways to handle paychecks to keep your employees happy and your books balanced are also things that all employers can improve. When it’s time to pay employees, knowing how to manage paychecks effectively can be incredibly important for your business.
What is a paycheck?
Very simply, a paycheck is the pay you give an employee to compensate them for the work they did during a set pay period. Once employers stopped paying their employees with coin purses and loaves of bread, paper checks (also known as cheques) became the norm. These checks were distributed to employees who could cash them or deposit them into their bank accounts, drawing funds from the employer’s own account.
This is still how many paychecks work and many employers still choose to offer paper paychecks because of the flexibility they offer. Employees without bank accounts can still take paper checks to their issuing banks or check-cashing services. They can also endorse them, signing them over to other recipients of their choice.
However, paychecks in the modern day provide more options for employers and employees alike. Many employees in the past few decades have received all of their pay via direct deposit to their bank accounts and have never even seen a real paper paycheck.
Newer forms of payment include pre-loaded pay cards (also known as payroll cards) and mobile wallets from digital payment platforms. Each method has its distinct advantages and disadvantages summarized in the table below:
Paychecks and Other Payment Methods
| Type of Payments | Advantages | Disadvantages |
|---|---|---|
| Paper checks |
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| Direct deposits |
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| Pay cards |
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| Mobile wallets |
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Paycheck vs. Paystub
When a lot of employees talk about getting their paychecks, they often mean their wages along with breakdowns of their pay. However, these breakdowns are not necessarily always included with paychecks and definitely represent something different.
A paper check is a document that normally states the name and address of the drawer (the employer drawing funds from their accounts), the name of the receiver (the employee), the dollar amount, the date, and the name of the bank issuing the check. Digital forms of payment store these fund transfer records in their databases.
In the past, paper paychecks came with detachable pay information. When employees separated the larger paychecks for depositing, they were left with stubs of paper, which are now still called paystubs. It’s mandatory to provide workers with pay stubs or their digital equivalents in many US states and countries around the world.
Pay stubs (also known as payslips or wage statements) provide a breakdown of an employee’s pay for a defined pay period. They’ll include the date of payment, the pay period date range, and both the employer’s and employee’s name and information. Pay stubs break employees’ pay down into three sections: their gross pay, deductions, and net pay.
Components of a Paystub
Gross Pay: Gross pay is the total earnings that an employee must be given for a pay period. This is normally shown on a paystub by indicating whether they are a salaried or wage worker and what their regular pay is for the period. This is based on the hours they worked for wage earners and the proportion of their working year covered by the pay period in the case of salaried employees. Pay stubs also indicate overtime hours, the employee’s overtime rate, and their overtime earnings. Gross pay can also include commissions, bonuses, or other allowances. Payroll departments use different payroll codes for these earnings categories.
Deductions: In the US, employers are required to withhold income, Social Security, and Medicare taxes from their employees’ salaries and these are the main deductions seen on their paystubs. Many states also require withholding for income and other state taxes. If an employee contributes to benefits schemes such as health insurance or retirement savings, these amounts will also be deducted from their gross pay. Again, payroll codes are normally used to encode these different types of deductions.
Net Pay: When deductions are subtracted from gross pay, the remaining amount is the worker’s net pay for the pay period. This is the amount that the employee will receive on their paycheck or transferred into their bank account.
Best Practices for Issuing Employee Paychecks
As an employer, you need to know more than just how to calculate each employee’s paycheck. Ensuring that payments are compliant, timely, convenient, and clearly explained can help to keep your employees happy and encourage them to stay with you long-term. There are also lots of ways you can make issuing paychecks more affordable and efficient for your business. Here are some suggestions for best practices on payday:
Know your state and federal laws.
Each state in the US and country in the world has its own regulations when it comes to paying employees. There are laws in place that govern the methods you’re allowed to use to pay them, the payday frequencies that are allowed, and of course, the deductions that are mandatory in each jurisdiction.
In the US, only a few states (California, Iowa, Michigan, New Hampshire, and Virginia) allow weekly, bi-weekly, semi-monthly, and monthly salary payments. The rest allow only between one and three of these different options. Different states also levy income taxes at different rates and some require employees to make contributions to other programs like unemployment and disability insurance. It’s crucial to know the rules for your state so you can make the right deductions and pay your employees compliantly.
Pay your staff on time.
Some employers pay their workers up to two weeks after the pay periods in which they earn their wages. This means that workers are always waiting a long time to receive the wages they’ve already earned, which can lead to financial stress and high employee turnover. If you can keep your payroll processing down to a few days, you can set a pay calendar that helps employees access their wages faster.
Provide different payment options.
Not all of your employees will necessarily have bank accounts and this can limit the number of ways they can receive their pay. If possible, provide multiple options for your employees so they can opt into the payment method that’s most convenient for them.
Create clear pay stubs.
Only some states require employers to provide pay stubs along with employee paychecks. Required or not, this is still a good practice because it provides your employers with a record of your earnings and deductions. They can use their pay stubs to check their calculations and double-check their W-2 forms when it comes to tax time. Use a paystub format that’s convenient for your payroll department to create, yet easy for employees to understand.
Automate what you can.
Payroll can be complicated and highly time-consuming. Thankfully, there are lots of software solutions available to help you automate your payroll processing to help you save time and maintain a higher level of accuracy than doing things manually. You can also choose to outsource this entire function to a payroll service provider, which can manage processing, payments, and tax remittances for a small fee per employee per month.
Provide balances with your checks.
Few things make employees more dissatisfied than being paid incorrectly. No matter how careful you are with payroll processing and paycheck printing, mistakes will sometimes still happen. Provide your employees with a clear process for reporting paycheck errors and try to process these incidents as quickly as possible. This will help your employees feel more valued and reduce their financial stress.
A Final Word on Paychecks
Your employees may love their jobs, feel challenged by their responsibilities, and enjoy the camaraderie of their teams. Just don’t forget that their main reason for working is to collect their paychecks. If you want to keep them feeling valued and respected and to keep them in your employ, do your best to manage their paychecks correctly, compliantly, and clearly.
To manage your paychecks better, consider Paystub Master’s paystub generator, ensuring compliant employee payroll.