Pay Stub vs. Bank Statement: Discovering the Key Differences
November 14, 2023
The key difference between a pay stub vs. bank statement is that the first summarizes employee earnings and deductions, while the second outlines transactions in a bank or credit card account.
While pay stubs and bank statements are both used as valid documents to prove your income when applying for loans or renting apartments, it is important to note distinct situations where each type of document proves useful.
Keep reading this article if you’re keen to know how pay stubs differ from bank statements and why you must keep copies of both documents if you want to manage your money more effectively.
- A pay stub and a bank statement are both considered by lenders and landlords as valid proof of income.
- Pay stubs detail an employee’s gross and net income, withheld taxes, and other voluntary deductions. Bank statements summarize an account holder’s monthly transactions.
- Employers issue pay stubs depending on the pay cycle they follow in managing their payroll. Banks send bank statements to account holders monthly.
What is a Pay Stub?
A pay stub records an employee’s gross and net earnings. To more precisely define what a pay stub is, it is a document that enumerates the total earnings of an employee in a pay period and the withheld amounts from their salary to pay for federal and state taxes.
Pay stubs also inform employees about the mandatory and voluntary deductions subtracted from their gross pay. These deductions include retirement plan contributions, health and life insurance premiums, wage garnishments, and union dues.
Bonuses, paid time off, salary deductions based on absences and tardiness, overtime pay, and commissions are also declared on employee paychecks.
Interestingly, the pay stub formatting and accessibility differ per state. What this means is that some states require employers to provide a printed or electronic copy of employee pay stubs. These states are also referred to as “Access States.”
There are also states that do not require businesses to issue pay stubs on either form. These states include Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Ohio, South Dakota, and Tennessee.
Aside from using their paychecks to verify their total gross and net earnings, taxes, and deductions in a pay period, employees also use their pay stubs as proof of income when applying for loans, opening a bank account, or renting residential spaces.
What is a Bank Statement?
A bank statement is a document issued by financial institutions and banks that details all activities and transactions in your account within a specific time frame. Typically, bank statements are issued monthly.
The key information on a bank statement often includes all withdrawals, deposits, and monetary transfers you’ve carried out using your bank account. Bank statements also record the details of your current account balance, as well as fees and charges linked to your account activity.
You can also use your bank statement to detect whether your account has been used to execute fraudulent activities and transactions without your knowledge.
If you are an employee and your employer sends your salary through direct deposit, you can also see all transactions between you and your employer declared in your monthly bank statement.
Bank statements can either be in print or digital format. For paper or printed bank statements, banks normally charge at least $3 per bank statement to cover the expenses that come with printing copies of the bank statement and mailing them to every account holder.
Alternatively, some banks email electronic copies of their customer’s bank statements every month.
4 Key Differences Between Pay Stubs & Bank Statements
It is essential to know the key differences between pay stubs and bank statements. While both are examples of financial statements that qualify as proof of income, bank statements and pay stubs differ in terms of who issues them and under what circumstances.
That said, here are the main distinctions between a pay stub vs. a bank statement:
Pay stubs are used to report employee income and reflect the work hours dedicated by an employee in a pay cycle. Employees also use their pay stubs to file their taxes because they provide information on their withheld taxes and deductions within the year.
In contrast, bank statements provide a summary of the transactions carried out in a person’s bank or credit card account. Banks record all transactions carried out in each account and then summarize all collected information to produce a bank statement.
#2. Issuer & Recipient
An easy way to distinguish a pay stub vs. a bank statement is to check who is responsible for producing each document and who is the recipient. Banks issue bank statements and send them to account holders either by regular mail or through email.
On the other hand, employers are responsible for issuing pay stubs to their employees. Self-employed individuals and freelancers can also create their own pay stubs using a pay stub generator.
Pay stub generators let employers, employees, and independent contractors create pay stubs in minutes by using ready-made templates and built-in calculators to compute taxes and deductions. They can also save electronic copies that they can print later on.
When comparing how often a pay stub vs. a bank statement is created and disseminated, bank statements follow a more fixed and consistent frequency. Banks prepare and issue bank statements on a monthly basis.
Employers issue pay stubs based on the pay cycle they follow in their company. Some employers issue paychecks weekly, bi-weekly, semi-monthly, or monthly. In that regard, employees from different companies and industries do not receive the same number of pay slips in a month.
The information declared on a bank statement focuses on all the transactions and activities carried out using an individual’s credit card or bank account.
Bank statements contain the following information:
- Account holder’s name and address
- Account number
- Bank name and branch or address
- Timeframe of the statement
- Starting and closing balance
- Cash withdrawals and deposits
- All other transactions carried out using the account
Pay stubs contain more extensive information aside from enumerating the gross and net earnings of employees. A pay stub must also show all the federal and applicable state and local taxes withheld from each employee’s salary.
If an employee is mandated by the court to pay wage garnishments, the said payment must be included in their pay stub.
Pay stubs also reflect the following voluntary deductions and salary adjustments:
- Life and health insurance premiums
- Retirement plan contributions
- Overtime pay
- Paid time off
- Union dues
- Bonuses and commissions
Employers must see to it that the gross earnings, deductions, and adjustments all add up to the value indicated in their employees’ net earnings. Discrepancies with employee salaries and paychecks can lead to complaints and disputes.
3 Reasons Why Pay Stubs Are Important
The following are the different reasons why pay stubs are important:
#1. They Serve as Proof of Income
Between a pay stub and a bank statement, lenders and banks typically have pay stubs at the top of their list of valid proof of income.
Pay stubs summarize an employee’s gross and net income—essential details that banks, lenders, and even landlords use to assess whether a debtor or tenant can afford the loan or rent.
Aside from income information, pay stubs also help verify the employment status of a loan applicant or tenant. Lenders will usually require at least three to six months’ worth of pay stubs.
They do this to check that the income reported is consistent and confirm that the applicant is currently employed.
#2. They Make Filing Taxes Easier
While employers and clients issue Form W-2, 1099-MISC, or 1099-NEC so employees or hired freelancers can file their taxes, pay stubs serve as a highly useful backup. At times, employers may fail to send their employees’ W-2 forms on time.
Late forms mean employees are likely to miss their tax filing deadlines and face penalties. The same scenario could happen for freelancers and taxpayers who use 1099 forms.
Filing taxes using pay stubs is not recommended by the IRS, especially since the said documents do not provide sufficient information about a taxpayer’s taxable income.
However, saving copies of pay stubs can come in handy when employees and independent contractors have not yet received their tax forms and need to file alternative IRS forms instead.
Employees use pay stubs to verify whether employers have withheld the correct amount for their taxes and calculate whether they owe taxes to the IRS or qualify for a tax refund. Independent contractors can use their paychecks to estimate their taxes in advance.
#3. They Help You Keep Track of Expenses
Pay stubs provide both employers and employees with a reliable reference for managing their expenses.
For employees, they use their paychecks to budget their daily expenses, from setting aside money to pay for their basic needs to estimating the amount they can put aside for their savings.
Meanwhile, employers save copies of employee pay stubs when updating their accounting books, calculating their accrued payroll, and reviewing their quarterly and annual operating expenses.
4 Reasons Why Bank Statements Are Important
Similarly, bank statements prove useful for bank account holders, whether they are regular employees, freelancers, or sole proprietors.
The following are the key uses of bank statements:
#1. They Flag Fraudulent Transactions
Since bank statements automatically record all the money that goes in and out of your account, you can detect any unauthorized or suspicious activities made through your account.
Fraudulent activities that involve stealing people’s personal information and bank account details remain rampant these days. With your bank statements, you have solid proof that you may have fallen victim to such scams.
For instance, you can identify whether fraudsters have made purchases using your credit card without your knowledge. You can also verify with your bank all unrecognized transactions and payments in your account.
#2. They Monitor Your Account Balance
Your bank statements outline your balance before and after all the transactions in your account within the month.
It can be difficult to keep a close eye on your account balance without any form of documentation. At the same time, if you have multiple bank accounts, keeping tabs on all your accounts’ remaining balances can be quite a headache.
Monitoring your account balance gives you an idea of how to manage your expenses and savings. You can decide whether to hold off on some purchases and save for a rainy day or allow additional expenditures if you have extra money in your account.
#3. They Provide a Reliable Record of All Transactions
Whether you regularly deposit money into your savings or receive your income and salary through bank deposits, bank statements reflect the activities that involve the money stored in your account.
If your employer deposits your salary or wage directly into your bank account, that should reflect on your bank statement.
In the same manner, if you withdraw money periodically from your account, your bank should record the transaction and reflect the activity on your remaining balance.
At times, you may also use a bank transfer to send payments to vendors. A bank statement helps confirm that the payment went through successfully. Otherwise, the amount should be debited back to your account, and your bank will not record any transaction.
#4. They Help Monitor Spending Habits
It can be quite tempting to splurge your money if you have a debit or credit card. Perhaps not seeing physical money get taken away from you at the counter creates the illusion of having endless funds to afford multiple purchases.
However, if you don’t have a bank statement to summarize all the different activities and purchases where you spent your hard-earned money, it becomes almost impossible to take a closer look at your expenditures.
By taking the time to review your monthly transactions and purchases, you can distinguish between essential and non-essential expenses and investments and eventually become more mindful of how you spend your money.
Distinguishing between pay stubs vs. bank statements is paramount to understanding when it is best to use each document.
For instance, you can use both your pay stubs and bank statements to prove your income, but you cannot use your bank statements to calculate your taxes and check whether you qualify for a tax refund.
In the same manner, you cannot use your pay stubs to detect fraudulent activities in your bank account or keep track of your remaining balance.
Pay Stub vs. Bank Statement FAQ
#1. Can you use bank statements as proof of income for an apartment?
Yes, you can use bank statements as proof of income for an apartment. Bank statements are among the most commonly required documents to prove a tenant’s income.
#2. Can you use bank statements as proof of income for getting a mortgage?
Yes, you can. Bank statements are one of the most common examples of proof of income and serve as a great alternative when you need to show proof of income without pay stubs.
#3. How long should I keep my pay stubs?
You should keep your pay stubs for at least 12 months, or until you have filed your annual taxes.
Employers can keep employee pay stubs for a maximum of three years. They must also know how to properly dispose of electronic and printed pay stubs to keep all employee information confidential.