What is a Paycheck?

Published by Thomas Herold in Corporate Finance, Laws & Regulations

'Paycheck' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Paycheck refers to a check that an employer issues in order to compensate its employees for their services and on the job performance. Such checks will commonly be sent out or direct deposited once every two weeks. Alternatively these are issued once per month or once per week. Those employees who are salaried will most commonly receive 26 individual paychecks each year (in even amounts). Those organizations that have non-salaried employees will insist that they punch and turn in time cards to help the payroll department track the hours each employee works. Any overtime hours for which they have worked will be paid out at time and a half their usual hourly wage.

Employers must withhold percentages of the compensation they pay out to cover income tax and social security payments. Employers must send in all withheld dollars to the Internal Revenue Service. It provides the IRS with a strict accounting of the amount of money employees earned as well as the dollar amount the company withheld and paid in on their behalf. This enables the IRS to compare employee-filed tax returns with their records which the employers turned in throughout the year.

Employers might also choose to hold back other monies from an employee paycheck in order to cover a portion of their health insurance costs and other benefits for the employee. They can also withhold legally mandated wage garnishment amounts as ordered by courts to pay for child support and alimony.

Traditional paychecks come with stubs. These are also called pay slips, pay stubs, and earnings statements. This is a component of the check that states the amount of money which an employee received as well as all money that was withheld for the various categories of income taxes, social security, and Medicare insurance. Such a stub will generally be perforated and attached to the paychecks so that they are simple to tear off from the rest of the check. As it is time to deposit or otherwise cash out the paychecks, they can simply be torn off from the stub so that individuals may keep their records properly. Such stubs keep the relevant details of all deductions off of the payroll which were done all throughout the year.

Besides being the primary means of compensating the employees, these checks can also serve the dual purpose of communications with the employee. The stub will generally detail the amount of sick days, vacation time, and paid time off that has been accrued through that pay period and also up to that point. As such paystubs came in envelopes traditionally, it was easy for HR departments to insert company newsletters, updates, and reminders into the paycheck envelopes.

Thanks to the enormous increase in electronic communications like emails, spreading the word to employees via payroll envelopes is no longer simple. Nowadays, many employers insist that their employees keep a bank account available into which they can directly deposit the payroll on every pay day. Not many employers deliver paycheck stubs in traditional envelopes any longer. Another change has been the migration of many employers over to a third party vendor company like ADP. These firms process employee payrolls and handle the direct deposits on the behalf of the employers. By going to a third party website, the employees can access their payroll records and withholding records.

Another factor of payroll affairs is what the courts call garnishment. This is the legal route of seizing funds from an employee paycheck in order to pay off debts which the employees owe. These are commonly either tax collection efforts from the IRS or because of a court-imposed order. Employers are legally obligated to work with these orders.

The money which the employee owes will simply be deducted from each paycheck till the debt becomes paid off or other arrangements exist between the employer and the employee. There are some limitations to garnishment. Without special exceptions, the maximum garnishment limit proves to be fifty percent of the total payroll due to an employee. This can be raised to sixty percent maximum if the employee does not have a second wife and/or child to support.

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The term 'Paycheck' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.