Payroll describes the entirety of a company’s processes, reporting, and standards for paying their employees. Not only does payroll include the actual procedures for distributing money to employees via checks or direct deposits, but also the accurate keeping of detailed records of all payments as well as the process of ensuring all taxes on employee payments are paid.
The process for payroll of a specific employee begins when they are hired and fill out a W-4 form. This form gives details about the individual’s tax status as well as how they want their taxes to be paid. Whether an employee is paid hourly or on an annual salary, they are still required to complete and submit a W-4 to their employer.
After a W-4 is submitted and the employee begins work, they are paid regularly (usually every two weeks, sometimes every week). The employer is required to withhold certain taxes from that employee’s pay, including federal and state income taxes, as well as Medicare and Social Security. This requirement is put on employers in order to reduce the amount of individuals who fail to contribute enough to their taxes at the end of each year.
This process, which includes calculating employee pay and withholdings, scheduling and distributing payments is generally known as payroll processing. This process also includes special circumstances that affect paychecks like time off, overtime requests, and more. We’ll discuss these in greater detail later.
A company’s overall record of all calculations for employee pay is known as their payroll register.
When it comes to managing payroll for a business, a business owner has a choice of one of three options. Payroll can be managed by completing it in-house by oneself or with a dedicated team, by outsourcing payroll processing to a third party firm or individual, or by using automated payroll software in order to streamline as much of the process as possible and save time and money.
There are advantages and disadvantages to each of these three methods for payroll management, so it’s worth considering how each one will affect one’s business and company processes in both the short-term and the long-term.
Completing payroll by hand will require a business owner to learn how to process payroll themselves, if they’re a sole proprietor or run a small business, or having an internal team manage it if the business is a bit larger. Unfortunately, this approach is significantly time-consuming and requires a certain level of expertise in how payroll and tax withholding works so that the owner can ensure to stay on the right side of regulations and laws.
Many companies outsource payroll processing to a third party firm or individual. While this means that a company wouldn’t need to spend internal resources (time) to process payroll, it would instead come with the monetary cost associated with paying an outside firm.
As payroll processing software becomes more powerful and inexpensive (sometimes free), the use of software to automate nearly every part of the payroll process has become extremely popular. It leads to less hours spent processing payroll, less user error, and a less expensive process overall. Payroll software is now capable of automatically calculating wages and necessary tax withholdings, generating checks or deposits, and even submitting required taxes.
A company must have a W-4 form on file for each of their employees, which gives the employer information about how much federal tax to withhold and the social security number associated with those taxes. No payroll can be processed or distributed for an employee until this information is on file.
For hourly employees, proper tracking of time worked is vital for payroll processing. Some companies will also track the hours of salaried employees, simply to ensure that they’re putting in enough work hours to justify their salary.
Many companies include information about time off (vacations, sick days, holidays, etc.) in their payroll processing. This is particularly important for the majority of companies that have a set amount of specific days off that employees are allotted each year.
Payroll records include information about how each employee is paid and how much. For salaried employees, this would include their annual salary and what that equates to in terms of payment periods. For example: a $24,000 salary split into 26 two-week periods equates to $923 in gross salary every two weeks before taxes are deducted.
Hourly wage rates are also tracked and recorded for each hourly employee at a company.
Companies are required to provide overtime pay when employees are asked to work beyond 40 hours in a single week. Pay for hours worked overtime must be at least 1.5x their normal hourly wage (or what one hour would come out to, calculated by their annual salary).
Non-salary or wage benefits can also fall under payroll processing, and can include things like health insurance, retirement contributions, and other incentives. These should all be reported and tracked in payroll.
Other sources of pay include tips, commissions, and bonuses. These must be recorded and processed through payroll, as well. While tips are paid directly from customers to employees, employees must still report the exact amount of their tips so that they can be properly taxed via payroll taxes.
Anything withheld or subtracted from an employee’s pay is known as a deduction. This can include payroll taxes like federal income tax, state income tax, Medicare tax and social security tax.
When an individual owes significant back taxes, the IRS may issue a garnishment over their wages. The individual would be required by the IRS to withhold some or all of their paycheck until the tax debt is repaid.
The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of Bill.com.