After receiving a paycheck, employees might be wondering how their wages were calculated, and what was deducted to go from the gross amount to their net pay.
An earnings statement is an important financial statement that both employees and companies can use to better understand how their net earnings are calculated.
This guide offers an overview of earnings statements, including the details they provide and what they’re used for, both for employees and companies.
Earnings statement definition
An earnings statement—also called an income statement or profit and loss statement—is a financial report that shows a company’s revenues, expenses, and net profit or loss over a set period of time. It offers a clear picture of the company’s financial performance and is essential for assessing its profitability and overall financial health.
What’s in an earnings statement for employees?
For individual employees, an earning statement is another term for their pay stub or pay slip. As such, it’s a document that breaks down the employee’s pay for a given period of time, including the gross wages earned, deductions for taxes and benefits, and the net amount they’ll take home.
In this context, the earnings statement is a key piece of payroll documentation, giving employees transparency into their pay, while employers get a clear audit trail for past pay runs.
An employee’s earnings statement typically includes a few main components, such as:
- Gross Pay: The total amount earned in the pay period, before accounting for any deductions.
- Deductions: Amounts withheld from gross pay, such as taxes (federal, state, local), insurance premiums, and retirement contributions.
- Net Pay: The final amount the employee receives after all deductions are subtracted from their gross pay.
- Key Information: Earnings statements may also include information like hours worked, pay rate, and details about benefits.
What is an earnings statement for businesses?
On the other hand, the earnings statement for a company records its gross earnings from business activities over a period of time, with deductions including expenses incurred to support operations, resulting in a final net earnings amount.
The earnings statement for a company may also be referred to as an income statement or a profit and loss statement. Importantly, this differs from the statement of retained earnings.
Either way, the earnings statement provides insights into its financial health, profitability, and operational efficiency.
For businesses, their earnings statements might include the following elements:
- Revenue: The total income generated from sales and other business activities.
- Expenses: Costs incurred in operating the business, such as cost of goods sold, salaries, and rent.
- Net Profit/Loss: The difference between revenue and expenses, indicating whether the company earned a profit or incurred a loss.
Why is an earnings statement important?
As mentioned above, earnings statements provide important transparency and visibility into an individual’s or a company’s finances.
In this way, earnings statements enable employers to foster trust and accountability with their employees, showing exactly which deductions are being applied and how their net earnings were calculated.
For employees, it provides an official statement of how much they earn, which can help them with budgeting and personal financial planning matters. These statements can also be used as proof of income when applying for loans, rental applications, credit cards, and more.
For a company, an earnings statement provides a snapshot of its financial performance, providing insights into how efficiently it turned revenue into profit.
How to access and use your earnings statement
Employees may have a few possible avenues to access and review their earnings statements. One option is to receive these documents directly from the employer, whether through the mail, in person, or through an online portal.
It’s also possible that the employer uses a third-party platform or service to handle payroll, meaning the earnings statements may come from these providers instead, whether in a physical or digital form.
Typically, employees will receive an earnings statement each pay period when payroll is run. They may also have an online portal or log-in where they can access past statements as needed.
Employees should review their earnings statements regularly to look for any possible discrepancies or errors in wage calculations, taxes, and other deductions. Any discrepancies that employees notice should be promptly reported to the payroll department so they can be issued a revised paycheck and earnings statement if needed.
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Frequently asked questions
How to read an earnings statement?
A pay stub provides detailed information about an employee’s or a business’s earnings during a given period. Read an earnings statement by reviewing the gross pay, then seeing which deductions were made for things like taxes and benefits, before verifying the net pay amount. The net pay should be equal to the gross pay minus total deductions.
Why is an earnings statement important for employees?
An earnings statement is important for employees because it helps them see how their employer calculated net pay for the latest pay run. Plus, employees may need an earnings statement as proof of income if they want to purchase a home, take out a car loan, rent an apartment, and more.
How often are earning statements issued?
An employee earnings statement typically accompanies payroll runs. Thus, the document might be issued weekly, bi-weekly, or monthly, depending on the company’s pay schedule.
