Payroll is the procedure through which a company pays its employees. It entails recording and paying all remuneration earned by an Employee within a specific period.
While virtually everyone has received a paycheck, unless you operate a business, you've probably never given much attention to the question: What is payroll? At first look, the payroll process may appear complicated, but with the appropriate knowledge and enough time, any small business owner can ensure that their employees are paid accurately and on time.
The payroll procedure has been streamlined.
The payroll process may get rather convoluted, but breaking it down into simpler parts will not only make more sense but will also make the process quicker and faster.
1. Maintain records
The first stage in processing payroll is a continuation of the continuing practice of maintaining correct records. As part of your onboarding procedure, have each new employee fill out the papers you'll need for payroll purposes. You should maintain track of your staff by doing the following:
W4 forms: This IRS form contains private data about the employee, such as their legal name, address, and Social Security number, in addition to details about their tax withholdings.
- Salary or wage information: This can be as simple as knowing what an employee makes per year or it can be a complex combination of hourly wages, overtime pay, tips, bonuses, and commissions.
Reward contributions and reimbursements: A portion of an employee's compensation will be used to pay for benefits such as health insurance and retirement programs. College tuition reimbursement or health insurance-related rewards for preventative treatment are examples of common refunds.
A solid rule of thumb is to document anything that might affect an employee's salary to account for such expenditures when preparing payroll.
To maintain records up to date, you'll need the following:
Employee's legal name and Social Security number
- Date of birth and legal gender of the employee
- Employee's profession
- When (day and time) the employee's workweek begins
- The number of hours worked in a single workday
- Total number of hours worked each workweek
- Compensation structure (weekly or hourly rate, commission, service-based, or salary)
- Normal hourly wage
- Total normal-time earnings during the week or day
- Overtime earnings totaled per workweek
- All pay deductions made by the employee
- Every pay month, total wages (gross and net pay) are paid.
- Dates of pay and pay periods
2. Keep track of time
A few elements influence time tracking. There are several methods for tracking how much time an hourly employee works to pay them based on their earnings, including digital and traditional time clocks. Other workers, such as freelancers or contractors, may submit their hours to you without requiring you to track them yourself.
It is not always required for salaried personnel to log their time. Tracking standards differ by state and by employee title, so be sure you've categorized them appropriately and that you're meeting any tracking needs.
3. Determine the gross wage
To ensure the accuracy of your payroll, you must calculate each employee's gross pay using payroll software or a paycheck calculator. Gross wages are the total amount of money provided to an employee according to their pay, hours worked, and any gratuities, bonuses, or commissions. For hourly workers, the formula for determining gross pay is as follows:
Gross compensation equals hourly rate x total hours worked in the pay period.
A salaried employee's gross salary is calculated differently. Instead of paying them an hourly rate multiplied by the number of hours worked, you divide their yearly income by the number of pay periods and pay them that amount. A salaried employee's gross compensation is calculated using the following formula:
Salaried personnel = annual compensation divided by the number of pay periods in the year = gross pay
4. Subtract Taxes and other deductions.
Employee payroll taxes and other payroll deductions are typically the most difficult aspects of the payroll process. Fortunately, current accounting software can substantially simplify the process by automatically deducting the appropriate sums depending on an employee's W-4. Payroll can still be done if you don't use accounting software; it simply takes longer.
Begin by claiming pre-tax deductions such as:
- 401(k) plans (as well as various other kinds of retirement plans)
- Contributions to Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA)
- Plans for health insurance
- Certain kinds of life insurance policies
After you've taken all of your pretax deductions, you'll proceed to payroll taxes. Understanding which taxes must be paid is a smart place to start.
You must deduct the following taxes from the majority of your employees:
- Income taxes are deducted and paid to both the federal government and (most) state governments. The IRS provides tax tables to assist you in determining how much an employee owes in federal taxes.
- FICA (Federal Insurance Contributions Act): FICA (Federal Insurance Contributions Act) is a levy that contributes to credits for future Social Security payments. FICA is taxed at a rate of 7.65% (6.2% for Social Security and 1.45% for Medicare).
After you've deducted taxes from the employee's gross pay, you'll subtract any voluntary deductions the employee has, such as:
- Certain life insurance policies are Roth IRAs.
- Wages garnished for union dues
- Plans for long-term disability
- The remaining funds represent the employee's net salary.
The amount of money they will receive on payday is referred to as their net pay.
5. Compensation for the employee
While the majority of employees prefer to have their wages deposited directly into their bank accounts, some people still prefer to get a physical check. Regardless of their preferred method, make sure you present them with a hard or electronic pay stub for their records. A pay stub should provide a detailed list of deductions.
6. Tax returns and deposits
As an employer, you must file and pay the taxes deducted from your workers' paychecks. Most firms will have to make quarterly payments to the IRS and the state.
Avoid paying late since it might cost your company additional money in the form of penalties that must be paid.
What is the payroll process for contractors or freelancers? Independent contractors or freelancers are frequently easier to pay than employees. You will pay them according to the parameters agreed upon, but you will not be required to collect taxes or other deductions for these employees. Contractors handle their own payroll, which means they must file and pay payroll taxes.
Payroll administration: three payroll systems to select from
You may conduct payroll for your firm in three ways: manually, through a professional payroll provider, or through payroll software. Each approach has pros and downsides, so spend some time investigating which is best for you.
Payroll by hand
Manual payroll is the most time-consuming way of payroll processing. As every worker's wage and taxes must be computed by hand, based on the size of your team, you may require the services of a full-time accountant or payroll specialist.
However, keeping payroll in-house has several advantages. It is the most cost-effective way to process payroll (assuming you can do it fast and don't have many employees). a huge number of workers). If you handle manual payroll, you may quickly and simply adjust an employee's categorization or deductions.
Payroll services provided by professionals
Professional payroll services are one of the simplest methods to administer payroll since someone else does everything. All you have to do is collect employee information and send it over to them, and they will handle everything from a tax deduction to an employee pay deposit. These corporations are an obvious choice for enterprises with a large workforce as well as those with sites in various states.
The cost of this knowledge is a disadvantage. While hiring enough people in-house to manage payroll would most likely be more expensive, payroll services can consume a significant portion of your budget.
