What is an Earnings Statement: Definition, Components & Importance Explained
October 20, 2023
An earnings statement is a financial report used to record a business’s expenditures and profits. It is also the term used by Human Resources to describe a record or document that describes the total amount of money paid to each employee.
It is essential for both employers and employees to understand the definition of an earnings statement, including its key components and importance.
Keep reading this article if you want to learn more about what an earnings statement is used for and why you, as an employee, should know this specific document by heart.
- An earnings statement in an HR sense is also called a pay stub, paycheck, pay slip, or pay statement. It is different from a balance sheet, which is used to record a company’s assets and liabilities.
- Employers use earnings statements to gain insight into their business’s financial health, while employees use their paychecks to prove their income to debtors and landlords.
- The key information in a pay statement includes gross and net pay, taxes and deductions, healthcare contributions, PTO, employer information, and earnings statement number.
What is an Earnings Statement?
An earnings statement, also called a pay stub, pay statement, paycheck, or pay slip, is a type of report or document used to summarize all wages paid to an employee in a given pay period.
Earnings statements also contain information about all deductions subtracted from employee earnings, including federal, state, and local income taxes, life and health insurance contributions, and retirement plans.
Aside from employee earnings and deductions, other key information included in a standard earnings statement or pay stub is the net pay. The net pay is the total earnings received by each employee after taxes, deductions, and other adjustments are subtracted or added to their gross pay.
All employees receive their earnings statements from their employer.
Employers can produce pay statements either manually or by using a pay stub generator. Pay stub generators are ideal and practical for both small businesses and larger companies because they use templates that take less than a minute to fill out and print.
Earnings Statement Vs. a Pay Stub
While the term ‘earnings statement’ is synonymous with a pay stub from an HR point of view, it is also used to refer to documents that enumerate a company’s profit, losses, and expenses.
An earnings statement used to provide information on a company’s expenditures and profitability is also called a profit-and-loss statement (P&L statement).
Combined with a business’s cash flow statement, balance sheet, and statement of retained earnings, the P&L statement gives business owners insight into their financial standing for a specific timeline or period.
What Information Goes on an Earnings Statement?
The following information is what comprises a typical earnings statement or pay stub:
#1. Gross Earnings
The gross earnings on a pay stub are the total earnings made by employees in a pay period.
It is one of the most important pieces of information present in any earning statement template.
An employee’s gross pay will depend on their hourly or regular rate, multiplied by the number of work hours completed in a pay cycle.
Gross earnings also include bonuses, overtime pay, and commissions earned. The gross pay does not yet include all tax withholdings and deductions.
#2. Net Earnings
If the gross earnings show the total income earned before taxes, net earnings reflect the remaining amount on employee wages after taxes and deductions are subtracted.
The net earnings on an earnings statement are also the amount that employees receive in their bank accounts or in cash every payday.
Deductions on a pay stub encompass mandatory deductions such as federal, state, and local income taxes, wage garnishments, FUTA, SUTA, and workers’ compensation insurance levied on employee earnings.
Voluntary deductions in the form of retirement contributions, insurance benefits, and union dues are also included under the deductions section of an earning statement.
#4. Healthcare Contributions
The Affordable Care Act requires all employers to provide all their employees with health and dental care coverage that won’t break the bank.
They must also indicate the total amount of contributions paid for healthcare from each of their employee’s regular pay on their pay stubs.
Healthcare contributions give employees insight into whether they have already been covered for health insurance by their employer through their earnings or if they have the option to pay their contributions themselves.
#5. Pay Period and Pay Date
The pay period is the number of days or weeks that reflect the number of work hours rendered by each employee. Pay periods can span a week, two weeks, 15 days, or a month, depending on whether a company follows a weekly, bi-weekly, semi-monthly, or monthly pay cycle.
A company’s accounting department uses the pay period as a basis to calculate an employee’s gross earnings, based on the number of work hours completed in a completed pay cycle.
Meanwhile, the pay date is the actual date when the earnings statement was released.
#6. PTO (Paid Time-Off) and Absences
Since the gross pay declared on each employee’s pay stubs is calculated based on the number of days or hours they completed in a pay cycle, their earnings statement must also specify any absences or paid time off.
Doing so provides a complete and reliable reference for employees in determining whether their gross and net pay adhere to the number of days they spent working.
#7. Employer Name, Address and Contact Info
The employer’s name can also be the employer’s legal operating business name. An earnings statement must also contain the employer’s business address and contact information.
Fake pay stubs often contain made-up employer names and fake contact information. As such, landlords and lenders often look at the employer information on a debtor’s pay stub to verify the borrower’s employment status.
#8. Earnings Statement Number
The earnings statement number, or check number on a pay stub, is a four-digit code that accountants use as a reference in monitoring the number of pay stubs released to employees.
Check numbers on employee paychecks are important in establishing and maintaining an organized and error-free payroll process.
The Importance of Earnings Statements
The importance of earning statements lies in their impact on a business’s long-term stability and how they can prove instrumental for employees when applying for loans.
From a business owner’s point of view, pay stubs are instrumental in reviewing their operational costs and accruals. They can double-check that all employees are compensated accordingly and that their taxes and contributions are well-accounted for.
Employers can face legal action and even get investigated by the IRS if they are found to have not been compensating their employees correctly or withholding a sufficient percentage from their salaries to pay their taxes.
At the same time, employers can use records of previously released paychecks to budget their expenses accordingly and plan the business’s spending practices ahead of time.
As a business continues to expand, it is important to keep track of whether income is retained for reinvesting and improving the company’s financial standing.
For employees, it is important that they get physical or digital copies of their pay statements. Pay statements come in handy when they apply for personal loans, car loans, or rent an apartment.
Earnings statements are considered viable documents for proving income for debtors and tenants. Pay stubs also come in handy during tax season, especially if an employee has not yet received their W-2 form from their employer.
Every employee must know the purpose of their personal earning statement and how they can use their paycheck records to monitor their compensation and taxes and secure loans in the future.
Conversely, all employers must comply with the different pay statement requirements in their state and ensure all information about their employees’ earnings is securely stored and easily accessible in case their workers have inquiries about their wages.