Two syllables, one word. It’s a must if you are an employer. Yes, we are talking about payroll. This is a general term in the workplace. What is payroll?
Payroll spoiler alert: Payroll is the process of paying employees. Employees don’t get paid if there is no payroll. If you have employees in your business, payroll must be run.
Payroll is the act of paying employees. Payroll Software is the process of paying employees. Payroll is not just about a paycheck. There are many moving parts to payroll, such as gathering employee hours, calculating taxes, deducting taxes, paying wages, and reporting taxes and deductions to the right people (e.g., IRS).
Payroll meaning can be described as:
Running payroll this is the actual calculation and distribution of taxes and wages.
Payroll employees: This list includes the names and information of all employees that you pay. It does not include independent contractors.
Payroll expense: This is what your company spends on wages and taxes. The expense must be recorded in your accounting records.
It is time to get deeper into payroll.
Key terms for payroll
Are you ready for a fast round of essential terms and conditions in payroll? These are some terms that are commonly used and their definitions.
- What is the payroll process? A detailed look
- Payroll has many moving parts. This section will explain what payroll is.
- Before you can start managing payroll, you must make some critical decisions. You must also:
- Your payment frequency (e.g., biweekly)
- Register for an Employer ID Number (EIN) and state accounts (e.g., state unemployment insurance).
It would help decide whether an employee is exempt from overtime wages when you hire them. To properly distribute and run payroll, you must collect the Form.
Let’s take a closer look at the components of payroll on a micro-level.
1. Keep track of your time
- It would help if you tracked your employees’ time to run payroll. This includes:
- Regular hours of work
- Time Off (e.g., paid off time off)
You can track employee hours to ensure that you pay your employees the correct amount. Employees should keep timesheets that show how many hours worked and whether they were absent.
2. Calculate the gross wages of employees
There are many options for salaried, hourly, or hybrid employees. You can calculate their gross earnings once you know how many hours they worked.
Divide the annual salary by the number of pay periods to calculate the gross wages for salaried employees. For example, you pay a $50,000 annual salary to an employee paid weekly. The employee’s weekly gross wage is $961.54 (50,000 annual salary x 52 weeks). If the employee works more than 40 hours per week and is not exempt from overtime, you must account for this overtime.
For hourly employees, multiply their pay rate by the hours they worked during the pay period to calculate their gross wages. Let’s assume that you pay $18 an hour to your employee. You would pay $720 to the employee if they worked 40 hours a week.
Remember that employees may have additional sources of income, which you should include in your payrolls.
3. Add taxes and other deductions
Subtracting taxes and other deductions from employees’ gross wages is one of the most crucial (and confusing!) parts of payroll.
Pretax deductions first, find out if the employee has pretax deductions. Add them to the employee’s gross pay before you calculate applicable taxes.
Taxes next, calculate the employee’s tax withholding. The following taxes must be deducted from the employee’s salary:
- Federal income tax
- Social security tax
- Medicare tax
- If applicable, income taxes from the state and local governments
Remember that employers must pay employment taxes on the wages of their employees. Employer taxes include Social Security and Medicare, federal unemployment taxes, and state unemployment taxes.
Withhold any post-tax deductions from an employee after calculating employee taxes.
4. Pay employees
Voila! After subtracting taxes from the gross wages of the employee, voila. This is the net or take-home pay of the employee.
Verify that all calculations and information are correct before you pay employees. After you have approved payroll, it is time to pay your employees.
You might pay employees via:
- Direct deposit
- Mobile wallet
- Pay cards
You might provide digital or paper pay stubs to employees when you pay them. Employees can view their payroll information this way.
5. Deposit and file taxes
Do you think that paying employees is the end of the payroll process? It’s not so easy. Also, you will need to file taxes and deposit them with the IRS, and, if applicable, your state and local governments.
The IRS allows you to deposit federal income, Social Security, and Medicare taxes. Depending on your deposit schedule, you must deposit them monthly or biweekly. You can file Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Report to report taxes.
Depending on the rules of the tax agencies, deposit state and local taxes. Depending on the tax agency’s rules, you will need to file different forms.
Last but not the least, remember that employee-only taxes such as federal unemployment tax or state unemployment tax must be filed and deposited.
6. Keep track
You must keep records of all transactions, including those relating to the Fair Labor Standards Act and the Internal Revenue Service.
How do I run a payroll?
Now it’s time for you to learn what payroll is? And how to manage payroll. There are three options for managing payroll.
- Payroll by hand
- You can outsource your payroll
- Payroll software is a great option
1. Payroll by hand
This is the most expensive but time-consuming payroll option. This option requires that you are familiar with payroll basics.
Calculating taxes and other deductions must be made manually. The IRS provides the federal income tax withholding tables. For more information about state income tax withholding, consult your state.
Keep detailed and organized records safe and secure. You might use a spreadsheet, for example, to show gross, taxes, deductions, and net pay.
Last but not least, you are responsible for filing and depositing taxes at the IRS and any other state or local agencies, if applicable. To avoid penalties and late fees, set reminders on your calendar.
2. You can outsource your payroll
Outsourcing payroll is the best option for payroll. However, it can be more expensive and takes less time. While outsourcing payroll can free you up to do payroll manually, it is still a cost-effective option that you need to consider.
A payroll accountant or professional employer organization (PEO) might be the best person to outsource your payroll. The company or person you outsource payroll to usually handles the entire process, from calculation to wage distribution.
3. Payroll software is a great option
Are you looking for a middle ground between outsourcing payroll and payroll manually? Payroll software may be the right choice for you.
Payroll software is often affordable and straightforward to use. What is payroll software? Payroll software calculates wages, taxes, and other financial information that you don’t have. You don’t need to use the IRS tax withholding table.
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