Payroll denotes the payment the employees receive from an employer or an organization. It describes the financial records the organization holds regarding employee pay. On the other hand, it also refers to the process of the company paying its employees while taking care of tax requirements.
Read on to know more about the fundamentals of payroll, how it is processed and the other options for organizations that require trustworthy partners to take care of it for them.
What is Payroll?
Payroll is a key function that an organization performs to make precise payments to its human resources. It includes everything that relates to the distribution of cash in the form of bank deposits, cheques and much more.
Payroll also involves maintaining records in connection to the payments made to the employees and taxes taken care of from the part of the employer. It comes in handy to evaluate employees’ annual salaries at the end of the fiscal year.
Payroll software automates the entire payroll process, allowing businesses to simplify and streamline payroll administration. It reduces paperwork and eliminates manual errors, allowing payroll managers to complete payroll processing as soon as possible.
How Payroll Works
Payroll begins as and when an employee fills out the W-4 form. This form indicates how taxations are carried out. It will keep track of all the taxes the company bears on behalf of the employee throughout the year.
Based on the details mentioned in the W-4 form, the company will pay its employees on a regular basis. The time period may vary from one employee to the other including, weekly, bi-weekly, monthly or any other fixed payroll pattern.
Once the gross pay is calculated, the company withholds payroll taxes, which usually include contributions towards healthcare insurance, retirement plan, union dues, charity and much more.
The company makes appropriate deductions before distributing periodic payments to the employees. This process is termed payroll processing.
Steps in Payroll Processing
Payroll processing involves a series of actions where the employer pays the employees after making appropriate deductions on various grounds. The process involves five major steps as follows.
Once an organization hires a new employee, the payroll information has to be entered in the W-4 form to facilitate hassle-free deduction of taxes every time payroll is processed.
Net Pay Calculation
The net pay of an employee is his or her gross pay minus the corresponding tax deductions and withholdings involved. These deductions and withholdings usually include social security, healthcare and other local taxes that are mandatory.
Once the deductions are made and the net pay is finalized, the employer distributes it to the employee either via cheque or direct payment deposit.
After the distribution of payment to the employees, the organization has to submit a tax filing regarding withholdings to the state authorities.
This stage involves forwarding all taxes and other benefit payments to corresponding authorities, including, healthcare insurance companies and retirement plan firms accordingly.
Components of Payroll
While there are many components in the payroll process, they can be broadly divided into three main categories: employee information, pay and deductions.
As mentioned earlier, the first thing to do when a new employee joins the organization is to fill the W-4 form. Apart from the employee’s income tax withholding, the W-4 form also contains basic particulars including the employee’s name, residential address, social security number and much more. These details help in processing payroll and take care of deductions in a seamless way.
The second component in the list is the employee’s pay. Irrespective of the nature of the payment (hourly, weekly, bi-weekly and monthly), a fixed sum of money gets added to the employee’s account. The pay stub shows everything about the employee’s payroll, including the gross pay, deductions and withholdings, net pay, total hours at work, overtime pay, reimbursement, additional pay and much more.
Deductions refer to the amount that is taken away from the employee’s account towards payroll taxes, withholdings, benefit deductions and other purposes.
(i) Payroll Taxes
Payroll taxes are the most common forms of deductions applicable in salary processing. It mainly includes social security taxes and Medicare taxes at large.
(ii) Payroll Withholdings
Payroll withholdings refer to the kind of deduction towards both income and unemployment taxes. The income tax deduction depends upon the details filled in the W-4 form of an employee. However, both income and unemployment taxes vary from one location to the other.
(iii) Wage Garnishments
This deduction does not apply to everyone. It is usually carried out on account of a court order in connection to credit or civil matters. Wage garnishment involves a wide range of payments, including, medical bills, personal loans, student loans, consumer debts, child support and many more.
(iv) Benefit deductions
Benefit deductions refer to health insurance and life insurance and retirement plan costs. While the employee and the employer contribute to health insurance, the retirement plan costs are deducted from the employee’s salary to be added to the retirement plan account.
How to Calculate Payroll?
The payroll calculation method differs from one company to the other based on the components taken into consideration. However, here is a look at the general payroll calculation method.
Gross pay is calculated first. For instance, when the organization wants to calculate the gross pay of an employee who is paid on an hourly basis, this is how it goes.
Hourly cost x Total number of hours spent at work during the specified time period.
On the other hand, if you want to calculate payroll for a salaried employee, you get the gross pay when dividing the yearly pay of the employee by the total number of pay periods in a year.
Annual Pay / Number of pay periods in a year
Once the gross pay is calculated, all the deductions are taken into account.
Gross Pay - Deductions = Net Pay.
The net pay is the amount the employee finally receives from the employer via cheque or direct bank deposit.
Payroll processing can be confusing and time-consuming. A clear understanding of its basics can be of great help. However, processing payroll for contractors and overseas employees is still a herculean task given the varied local laws.
The problem can be solved by outsourcing payroll. With payroll outsourcing, you can sit back and relax while approving payroll in a click. This, in turn, saves you manpower, time and money like never before.
Want to eliminate the stress of global payroll processing for your remote teams? Our technology platform can make it a cakewalk for you. Get in touch with us at Multiplier today.