Overview
The term “paycheck” was introduced in the early 1900s. The employee received a check (a piece of paper that an employee took to a bank to exchange for money) to pay for the hours worked. On rare occasions, the employee received a stub showing the number of hours worked, the rate of pay, and the amount paid. Since there were no deductions, the “gross” (total earned) and “net” (take home pay) were the same.
Your current paychecks are similar to the one from the 1900’s in four ways. They include:
- The name of the bank
- The name of the company or individual paying you
- The employee’s name
- The amount paid
Before we go into the differences between now and then, let’s go over some fun facts.
Fun Facts
- From 1862 employees paid an “income tax” to help defray the cost of the Civil War. Congress stopped it in 1872, ten years later.
- In 1900, the average worker made $.20 an hour and worked a 59 hour work week for a total gross pay of $11.20 per week, (nearly $600 annually). Since there were no tax deductions, the whole $11.20 was theirs to use.
- Wisconsin passed the first state income tax in 1911, but it wasn’t deducted from earnings.
- In 1913, (41 years later) a constitutional amendment was ratified that allowed the deduction of income tax from a worker’s earnings. Things have never been the same since.
- In 1937, the Social Security Tax was instituted as a “payroll tax” on the first $3,000 of a person’s wages.
- About the same time, in 1938, the Fair Labor Standards Act established the first federal minimum wage at .25 an hour (about $4.81 in today’s dollar). The average annual earnings increased to $1,731.
- Prior to 1943, there was no standard method of collecting payroll taxes. Many people paid their taxes at the end of the year. A whole lot of people didn’t pay at all.
- The Revenue Act of 1942, hailed as the “greatest tax bill in American history” was passed, increasing the number of people who had to pay income tax from 6% of the population to 74%. In 1945, regulations passed requiring employers to deduct taxes and remit them quarterly – the “pay-as-you-go withholding” we are familiar with today.
- There was no going back after this tax bill went through. Occasionally the tax rates change after congress decides that we are paying too much or too little to cover all the bills the government generates. So back to our paychecks.
3 Most Popular Payment Systems
There is such a variety of payment systems today, it’s difficult to talk about a standard. The three most popular ways are:
- Paycheck – you still get a physical check you take to your financial institution and exchange it for cash
- Advantages – complete control once you receive paycheck. Do not have to divulge any banking information.
- Disadvantages – can be lost or stolen – need to contact your employer for a replacement. May not be able to cash on holidays and weekends when banks are closed.
- Direct Deposit – your “net pay” is deposited directly to an account you choose
- Advantages – can normally chose up to three accounts to which to deposit money (checking, savings, investment account)
- No worries about lost or stolen checks
- Timely payment, no worries about when money is deposited, even when employee is on vacation
- Disadvantages – can’t think of any
- Advantages – can normally chose up to three accounts to which to deposit money (checking, savings, investment account)
- Pay Card – your “net pay” is deposited directly to an employer issued debit card, which you can use as a debit card to withdraw cash from an ATM, grocery shop, or shop online.
- The advantage of a Pay Card is that you do not have to have a bank account or banking relationship to pay bills or shop in person or online. You can pay directly with your Pay Card.
- The disadvantages include the possibility of monthly maintenance fees, out of network ATM fees, balance inquiry fees. Pay Cards can also be stolen and used.
Length of a Pay Period
The most common length of a pay period is bi-weekly – every two weeks. Nearly 43% of employees are paid every two weeks or 26 times a year. Approximately 33% are paid weekly, leaving the rest paid monthly or bi-monthly (that’s twice a month or 24 times a year).
An old concept, especially popular for farm workers, is becoming popular again — daily pay. It is now used primarily for high-turn over jobs like being a restaurant server, driving for Uber, valets, delivery drivers, pet sitters, online tutors, lawn maintenance workers, daily laborers in construction, etc. It is also being used in the medical field, with nurses and other health care workers being paid after they finish their shift.
PAY STUB
Regardless of how you’re paid, you should also receive a paystub or “pay advice” or “pay statement” which lists
- An employee ID #. Most employers don’t use social security numbers, for security reasons
- Pay period
- Pay date
- Total hours paid
- Pay Rate
- Gross Pay (hours paid x pay rate)
- Deductions, including:
- Tax withholdings – federal (income tax, Medicare and social security tax), state, city, and local taxes. There are nine states that do not have a state income tax
- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
- Medical insurance deductions
- Life insurance deductions
- Disability insurance premiums
- Dental insurance
- Wage garnishments
- 401K deductions
- Net Pay (Gross Pay less the deductions) Otherwise known as your Take-Home Pay
- Tax withholdings – federal (income tax, Medicare and social security tax), state, city, and local taxes. There are nine states that do not have a state income tax
- How many hours of vacation or “paid time off” are left in an employee’s bank.
As we become more and more automated, many employees don’t provide paychecks, paystubs, or pay advices. Instead they give employees 24/7 access to an online portal where employees can log in securely and view al their current and historical payroll information.
Understanding your Paycheck Stub | How to Read your Pay Stub
One of the most important things this video points out is “employees need to check their pay for accuracy,” Humans put the data into the system, and humans are not perfect. Everyone makes mistakes – everyone. So take the time to look at your pay statement from time to time to make certain:
- The pay rate is right, the hours are right, and your deductions look right.
If you find an error, either mention it to your boss or call the Human Resources Department. Don’t be upset – remember everyone makes an occasional error. It’s your responsibility to make sure your pay is correct.