Save your pay stubs until you have completed the tax-preparation process for the year the income was earned.
As you walk from your mailbox into the house, you feel the sweat beading up on your forehead, because you have an unwanted letter from the IRS. Before you get into this potential quagmire, be sure your financial practices are up to speed with common requirements. How long you keep your pay stubs is a personal decision based on your individual financial situation and needs. There are certain minimal requirements, however, that can save you many headaches if you have a need to obtain these documents and have discarded them too soon.
History
Not long ago, most employees were paid in cash by a bookkeeper at the end of every pay week, typically on Friday. The cash often was accompanied by a handwritten or hand-typed sheet of paper that constituted the pay stub. The key purpose of the stub was for payroll and tax tracking, and that continues to be the main use, though many companies use the pay stub as a communication tool, with information about events and the deductions taken for taxes, insurance, charitable contributions and benefits.
Time Frame
Save your pay stubs until you have completed the tax-preparation process for the year the income was earned. Also, before discarding the stubs, match your earnings to the Social Security Earnings Statement you receive annually to ensure accurate carry-over of this information. A good practice would be to save the final stubs for each year and keep these documents with your tax returns for the seven-year requirement.
Benefits
You may need pay stubs for information other than taxes. Saving the last stub for each job can be helpful if you need to find the hire and termination dates of jobs you have held. When you complete employment, mortgage or loan applications, you will want to ensure the accuracy of this information, because you can be denied if any date discrepancies are discovered. Also, records for money deposited in 401(k)s or other savings vehicles should periodically be matched with the information on pay stubs and year-end statements. If any discrepancies are discovered, you will want to contact your employer and the savings provider.
Effects
Even if you have thrown away all your pay stubs, starting these practices will give you some peace of mind for possible audits in the future. Ultimately, the usefulness of the pay stub lies in its value as a checkpoint for you to ensure the accuracy of your employer's record-keeping practices. The possibilities for errors exists, particularly in small businesses with only a few employees and more manual processes.
Expert Insight
If you save the final paycheck for each job you have in each year for at least seven years, you will cover most of the major contingencies. This may seem excessive, but in situations in which the company goes out of business or into receivership, retirement plans based on these earnings could come into question. If something should happen to the company during that seven years, you should save those year-end stubs indefinitely.
Warning
Don't assume the pay stubs and Forms W-2 you receive from your employer are accurate. Examine these documents at year-end before you complete your taxes and contact the employer if you have questions about any inconsistencies. Also, note that cafeteria plans with such benefits as life and health insurance have different tax treatments, and the taxability of these benefits may appear on the pay stub differently than on the W-2s.
