Payroll Codes Explained: How to Read Them From a Pay Stub
October 26, 2023
Payroll codes are pay stub abbreviations that help accountants and payroll personnel regulate their payroll management processes and guarantee that all employees are properly compensated.
There is much to learn about payroll codes, from the different types of codes used by employers to understanding how to read the meaning of each.
This article will discuss everything you need to know about payroll codes and how they will help boost your payroll management’s efficiency.
- Payroll codes are abbreviations on pay stubs that represent key information about an employee’s gross and net earnings, withheld taxes, and voluntary deductions.
- The four main types of payroll codes are earnings payroll code, tax deductions payroll code, pre-tax deductions payroll code, and post-tax deductions payroll code.
- Knowing the definition of each payroll code is a must for both employers and employees because it represents a transparent and reliable payroll management system.
- Using a pay stub generator is a surefire way to generate all the necessary payroll codes when preparing pay stubs.
The Importance of Payroll Codes
The importance of payroll codes lies in the fact that they ensure consistency and uniformity in organizing payroll records.
Organize Employee Information
Ensuring accuracy, consistency, and transparency in processing all employee wages and deductions is paramount, whether a company has less than 20 or over a hundred employees.
Since most payroll codes are universally used across startups and large companies, they are also instrumental in maintaining the accuracy of employee information on each pay stub released by employers.
Without payroll codes, it will be easy to lose essential employee data or mix up past payroll information with more recent ones. Businesses that use a primary payroll journal entry need paycheck codes to update their payroll register.
Identify Deductions and Other Salary Adjustments
Let’s say an employee has questions about the taxes withheld from their salary, their insurance, and their retirement contributions. Or, a former employee requests copies of their last pay stubs.
Understanding the meaning behind each payroll code gives employees a better idea of how to interpret all the values, adjustments, and deductions applied to an employee’s earnings.
After all, the codes generated for each payroll represent not only the total gross earnings of an employee but also the different taxes and deductions withheld from their income.
Distinguish Universal & Company-Specific Paycheck Terms
It is worth noting that some codes were created specifically by companies to ensure smoother payroll processing within the organization. Others are universal in nature, meaning they are used and recognized across different organizations and government offices.
The different payroll codes also vary based on how and when they are used in an employee’s pay stub.
Earnings Payroll Codes
Earnings payroll codes are pay stub abbreviations that pertain to the employee’s job role and the pay period covered by a specific pay stub or payroll.
The said code also encompasses all types of pay or compensation, whether they refer to the employee’s regular rates, paid time-off, or overtime pay.
Enumerated below are the different earnings payroll codes:
Earnings Payroll Code
The employee’s salary or pay as indicated in their employment contract
Reg pay, or regular pay code, is used if employees are paid hourly
The percentage of employee earnings covered by the Family and Medical Leave Act (FMLA)
Overtime pay. Some companies include the corresponding rate used to calculate overtime compensation
Compensation given to employees when they contract an illness
Bereavement leave pay
Compensation for jury duty
Tuition reimbursement, or the payment refunded by employers if employees had to undergo training and pay for it upfront
Alternatively, employers may use the payroll code reimbursement instead if they reimburse other types of work-related expenses initially covered by their employee, such as accommodation, meals, and transportation
This refers to incentives or additional pay given to employees at the employer’s discretion
Tax Deductions Payroll Codes
Tax deductions payroll codes, or federal pay stub codes, show the different taxes withheld from employee earnings. These include both federal and state tax deductions.
Tax Deductions Payroll Codes
The code refers to the employee’s federal income tax. Other variations for this code include FWT (Federal Withholding Tax) or FITW (Federal Income Tax Withholding).
It refers to state income taxes withheld. There are also alternative codes for state taxes, such as SIT (State Income Tax) or SWT (State Withholding Tax).
As its name suggests, the code stands for any applicable local taxes based on the employee’s location or place of employment. Tax rates may differ per locale.
FICA stands for the Federal Insurance Contributions Act. It is a type of tax deducted from employee paychecks to help fund the government’s Medicare and Social Security programs.
It represents Medicare taxes. Medicare taxes comprise 1.45% of each employee’s taxable wage.
This code refers to Social Security taxes, which are 6.2% of the taxable income.
Federal Unemployment Tax Act or taxes paid for by taxpayers to help generate funding for the government’s unemployment program.
State Unemployment Insurance changes annually and also varies by state. Not all states withhold SUI from employee pay slips. It is important that employees check with their state government’s tax rules and regulations on SUI and other mandatory salary deductions.
Pre-Tax Deductions Payroll Codes
Pre-tax deductions payroll codes are paycheck deduction codes representing all voluntary deductions withheld before taxes are imposed on employee earnings.
Most pre-tax deductions come in the form of retirement plan contributions, medical and dental benefits, and disability insurance. Pre-tax deductions significantly reduce an employee’s taxable earnings.
Let’s define each code one by one:
Pre-tax Deductions Payroll Codes
It refers to your contribution to retirement plans such as a 401k.
FSA means Flexible Spending Account, while HSA is Healthcare Spending Account. FSA and HSA are akin to a preset borrowing limit that workers can use to pay their healthcare expenses.
The values under the MED/INS payroll code pertain to employee contributions for their medical insurance premiums.
It stands for pre-tax deductions meant to cover vision insurance premiums.
DEN (Dental Premium) is a code used when employees elect to receive dental care services such as teeth whitening, teeth extraction, and regular checkups. The deductions will depend on the employer’s dental care plan of choice.
Dependent Care Reimbursement
STD (Short-term Disability Withholdings) and LTD (Long-term Disability Withholdings) appear on the pay stubs of employees who benefit from disability insurance.
Post-Tax Deductions Payroll Codes
Post-tax deductions payroll codes represent all the deductions applied after taxes are subtracted from gross wages. Post-tax deductions do not affect or change an employee’s taxable income.
Post-tax Deductions Payroll Codes
Union Dues are voluntary post-tax deductions used to pay contributions to labor unions. It typically takes up 1–2% of an employee’s gross earnings.
When spelled out, R401 means Roth 401(k) which is a type of retirement plan. Employees invest in their R401 account by contributing a percentage of their earnings. Roth 401(k) contributions are tax-free and continuously multiply until such time that the employee reaches retirement and proceeds to withdraw their accumulated contributions.
This is a type of wage garnishment charged at a flat rate. Examples of garnishments are alimony, penalties or fees, and child support.
The code also stands for wage garnishment. The presence of the percentage symbol next to the code ‘Garn’ means that the garnishment imposed is worth at least 25% of the employee’s taxable pay.
This code means Child Support and employees who have this payroll code in their pay stub are mandated to give child support payments.
Student loans are deductions used to pay off education or school-related debts incurred by employees while finishing their course or degree.
Employee Sponsored Pension Plans are retirement plans that let employees contribute or deduct part of their income to an investment account.
This payroll code only appears on employee paychecks if the company has filed for bankruptcy.
How to Read Payroll Codes From Your Pay Stubs
The key to reading payroll codes from pay stubs is to first know the definition of each abbreviation.
Learn how to distinguish payroll codes meant to describe specific tax deductions from the abbreviations used to represent all the adjustments and additional pay applied to an employee’s regular earnings.
For instance, when labeling pre-tax and post-tax deduction values on a pay stub, it is crucial not to get confused and mix up the two categories. Otherwise, the resulting deductions and net income are incorrect.
It is worth noting that generating payroll codes is quite easy, and it does not require purchasing and using an expensive payroll system.
Using a pay stub generator is enough to incorporate the different payroll codes when preparing employee paychecks. Pay stub generators contain templates that often contain all the necessary fields in a regular pay stub, such as payroll codes.
Employers and independent contractors can fill out these blank fields with the correct information and produce accurate and reliable paychecks.
Payroll codes are among the most fundamental payroll terminologies that every human resource and accounting professional must learn. It is crucial to know how to read the different payroll codes and help employees understand what they mean on their pay stubs.
It is not enough to just compensate employees; they also have the right to know the purpose of each deduction and adjustment applied to their salary.
Aside from clarifying any queries regarding employee earnings and deductions, your knowledge of paycheck codes also serves as your guide in preparing accurate payroll reports and keeping employee records up-to-date.
Payroll Codes FAQ
#1. What is payroll?
Payroll is a term used to describe the process of compensating a company’s employees or staff. Payroll includes tracking each employee’s completed work hours, calculating their gross and net income, and disbursing earnings via direct deposit or check.
#2. What are the codes on my pay stub?
The codes on your pay stub are abbreviations used to show the different values yielded for your earnings and deductions.
#3. Why do you need to understand pay deductions?
It is important to understand pay deductions to determine whether employers are withholding the correct amount for your federal, state, and local income taxes, retirement contributions, life insurance premiums, and other deductions.
#4. How payroll codes help with compliance?
Payroll codes help with compliance because using payroll codes goes hand-in-hand with establishing an efficient and reliable payroll management system.
While companies and organizations can create and add different payroll codes as they see fit, there are mandatory codes, such as pre and post-tax deductions, that are crucial in monitoring employee contributions and taxes.
#5. Can payroll codes be changed over time?
Yes, payroll codes can be changed over time. However, the changes will vary per company, organization, or state. Some states may have slight variations with the codes and abbreviations they use, while some organizations have payroll codes created specifically for their business structure.
#6. How payroll codes affect employees?
Payroll codes affect employees positively, especially once they are educated on how to read each paycheck code. It enables them to understand all the different values declared on their pay stub and double-check the total net income they regularly receive.
For instance, if an employee uses up a portion of their sick pay or decides to contribute to their employer’s life insurance premiums, then they will know which codes to look for in their paycheck.
#7. What should I do if I don’t understand the codes on my pay stub?
If you are having trouble understanding the codes on your pay stub, the best course of action you can take is to seek assistance from the payroll or human resources personnel in your workplace. You can also ask for help from your employer’s accounting department.
Human resources, payroll management, and accounting all handle employee pay stubs and income and are, therefore, well-versed in defining and explaining the meaning behind each payroll code.