Why Choose Pay Stubs vs Bank Statements for Financial Proof?

In some situations, you may be asked to submit some form of financial proof. The documents seek to establish your financial capability. Some of the common financial proofs used include pay stubs vs bank statements.

However, you should know that they vary in different areas. It is, therefore, important to understand the distinctions. This helps you manage your finances and provide the correct documents where you have to prove income.

In this article, you’ll find a detailed analysis of pay stubs vs bank statements. We’ll also discuss when each can be useful in your situation.

What Is a Pay Stub?

A pay stub can simply be described as a document issued to a worker in addition to a paycheck. It details the employee’s pay within a particular period of time. The document shows your total earned wages and the amount that has been deducted. You also see how they arrived at your take-home pay.

The details displayed on pay stubs include the employee’s name and details. It also shows the pay period, company name and address. The document indicates your total revenue capacity without any deductions made. Here, depending on your employment status, they will include your base salary or yearly hourly pay. Overtime earnings, bonuses given, or commissions earned, among others, are also included.

Moreover, other information clearly displayed on pay stubs refers to different subtractions. This is what was deducted from the gross amount. You’ll see federal and state taxes, as well as Social Security and Medicare taxes (FICA). Contributions to health insurance or pension are also shown here. Then, any other deductions like union dues or contributions to charity.

Pay stubs may also have YTD figures that show the sum of the earnings or deductions. It shows the numbers from the beginning of the year up to the current pay period.

What Is a Bank Statement?

A bank statement is a statement given by a bank to the account holder. It contains details of the activities and transactions that occurred for an individual’s account. This can be for any period, but it is normally a month. It offers details on deposits, withdrawals, transfers, and other fees or charges for your account.

You find the account number, statement period, and your personal details like name and address in the bank statements. They keep track of all credits made into the account. These may comprise payroll checks, cash or check deposits, or transfers from another account. These deposits have the date, the amount of the deposit, and, at times, a description of where it came from. 

Just like the list of deposits, it also shows withdrawals taken out from your account. At the beginning and end of each statement period, the document shows your beginning and end balance.

Differences Between Pay Stubs vs Bank Statements

The disparities between pay stubs vs bank statements include:

1. Information

The information contained in these documents is rather different. Pay stubs provide details of an employee's earnings. You can see gross wages, deductions, and the net pay that gets to the worker. They may also present the year-to-date figures for these categories.

Bank statements give out varying information depending on the kind of account that a client holds with the bank. In general, they contain details on the account holder’s deposits, withdrawals, transfers and charged fees. Then, there’s the initial and final balance of the period covered by the statement.

2. Purpose

Next, it is necessary to define the document type and its primary purpose. Pay stubs deal only with your earnings while on the job. Then, any deductions may be made from there. They give an account of the amount earned from work and the deductions. That includes tax deductions and other subtractions made towards retirement or health insurance.

On the other hand, bank statements provide a more general view of what is happening with your money. It shows the money entering and exiting your account irrespective of the source.

3. Issuer

Another area that is a difference is where both documents come from. Pay stubs are produced when the payroll is prepared. They are issued at your workplace or can be provided by your payroll service company. The documents are closely associated with your employment relationship.

However, bank statements are issued by your bank or financial institution. They contain all transactions in your bank account, with income from employment being among them.

4. Issuance Frequency

The issuance frequency is not the same. Pay stubs can be generated based on the frequency at which a particular company chooses to pay its employees. This may be weekly, bi-weekly, semi-monthly, or monthly. It means that two employees from two different organizations can have a different number of pay stubs within the same period.

Bank statements are less likely to be irregular. They are usually produced monthly, no matter the person's employment status.

When To Use Pay Stubs for Income Verification

Pay stubs are popular more often than other documents that confirm a person's income. They are used in many situations:

Loans

When applying for credit or a loan, most creditors ask for pay stubs. This is because it displays the current position of the applicant. Both in terms of employment and their income. Employees, especially in mortgage lending, provide several months of pay stubs.

This helps them prove their stability, and lenders can calculate their debt-to-income ratios. It also lets lenders determine your ability to make the monthly mortgage commitment well into the future.

Rental Applications

During the sign-up process, landlords often request pay stubs from their applicants. This makes them ensure that you have adequate income to meet the rental costs. Usually, their income needs to be 3 times the amount of rent. It shows them that you can be in a position to meet all your expenses.

Tax Filing

Copies of pay stubs are also essential when preparing tax returns. They are also useful for your tax computation. Your employer has already declared the amount of income and taxes paid. Besides, it displays the pre-tax deductions that could impact your taxable income.

Government Assistance

In most cases, pay stubs are needed to qualify for some programs offered by the government. These programs usually have income limits. It is with your pay stubs that you will be able to prove the income you currently earn.

When To Use Bank Statements as Proof of Income

Bank statements have their uses, especially when pay stubs only provide an incomplete picture of finances.

Self-employed Income Verification

Bank statements are crucial to self-employed people, freelancers, or independent contractors. They do not have other kinds of pay stubs. These statements show that the business is getting income periodically from the clients. This proves revenue generation. Self-employed people can provide their bank statements to lenders or landlords. This can work when traditional employment verification is not available.

Multiple Income Sources

They can also be helpful for those who have many income sources. For instance, someone working a full-time job and a part-time job. Your bank statements compile every amount received and the source of this income. That includes part-time jobs, rental incomes, investments, or side businesses. This will provide a better idea regarding your total income than pay stubs only would.

Supporting Documentation

Aside from pay stubs, bank statements can also form a part of the supporting documents to be submitted. For major funding, such as for a mortgage, the creditor requires both sorts of records. Pay stubs are used to prove the income that you have declared. Bank statements help lenders see the inflow and outflow of money and other liabilities.

Wrap Up

Pay stubs vs bank statements to prove income depends on the circumstances. It also depends on the needs of the concerned requester. The two documents have different purposes. However, they are both useful in proving stability in terms of finance. In any case, if you have both, you will always be ready for anything that involves income verification. They can determine the difference between a pass or fail when needing loans, houses, or financial credit.

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