Running a payroll program is an exact process. From a small business with five workers to a conglomerate with five hundred employees, the principles behind payroll are essentially the same. Nowadays, payroll is oftentimes delegated to a specific team of HR or payroll professionals or payroll software. Even with the presence of automation and innovations, it is beneficial to understand what payroll is about.
What is “payroll”?
Payroll is a term that can mean several things depending on how it is used. First, payroll can refer to a complete list of all individuals that a company pays for their services along with their corresponding hourly rate, salary, and employee information. Next, payroll can also mean the compensation that a company pays each pay period. And finally, payroll can refer to a particular department within an organization tasked to calculate and process wages and taxes of all employees.
For start-ups and small businesses, processing payroll may fall on one person who is tasked with both finance and HR responsibilities. As companies expand and scale, payroll processing may be outsourced to a payroll provider or done in-house using payroll software.
How do employers process payroll?
There are different elements in processing payroll.
Before running a payroll program, remember that you need the following information:
EIN. This stands for Employer Identification Number. It is a unique number that identifies a business entity. An EIN is a permanent number that is never replicated for the use of another business
State and local ID numbers
Employee tax information via W-4
Payroll budget. This is how much employees will be paid
Payroll schedule. This is how frequent employees will be paid
Tax payment schedule
It involves keeping track and monitoring the number of hours each employee works, calculating time off, applicable overtime pay, calculating withholding taxes and deductions, and disbursement. Let’s take a look at each component for a better understanding.
Calculating earnings. A crucial part in calculating earnings is keeping an accurate record of the number of hours that an employee works. This way, you can ensure that you are paying them what is due. For hourly workers, multiply the hourly rate by the number of hours worked. If you have salaried employees, divide the salary by the number of pay periods in one year. Additionally, take note of any additional compensation that an employee is entitled to such as overtime pay and commissions from sales.
Calculate deductions. Take note that deductions are what you subtract from an employee’s gross pay. Payroll taxes must be withheld which include Social Security, Medicare, federal, state, local income taxes, state, and federal unemployment taxes. Additionally, other deductions are contributions to insurance funds, healthcare premiums, and other benefits. In some cases, garnishments may be ordered by a court as a post-tax deduction.
Payroll submission and disbursement. After calculating earnings and taking out withholding taxes and deductions, the final step in the payroll process is submission and disbursement. What an employee will receive in their paycheck reflects their net pay. This is commonly called “take-home pay.” What’s left from the employee’s gross pay will then be distributed to various accounts or saved to be paid according to the company’s tax schedule. For transparency, the employees receive a pay stub that indicates their earnings, amount withheld, with their year-to-date record of both earnings and withholdings.
I am an employer. What are my options in running my company’s payroll program?
The first option for small businesses is to process payroll manually. This entails doing each step manually which can take time. Not to mention, any manual work leaves a margin for human error. Another option is to outsource payroll processing to a payroll professional or accountant. Finally, you can opt to use payroll software for your business. Automating your payroll program may prevent manual errors and streamline processes.
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