What is payroll?
Payroll is the function by which a company pays its employees.1 It includes the distribution of money in the form of checks and direct deposits. It also includes keeping records of these payments and paying taxes on behalf of those employees. Payroll is used at the end of the tax year to determine employees’ annual wages. A company can use payroll as an abbreviation for its entire workforce or the cost of that workforce. A company may also say that it “does the payroll,” which may mean it processes the paychecks or calculates the taxes it owes to those employees.
Payroll is the compensation that a company must pay its employees for a certain period of time or on a specific date. It is usually managed by a company’s accounting or human resources department. For small businesses, payroll can also be done directly by the owner or an employee. Payroll processing is a time-consuming and critical activity. Taking this task away from your employees can help them focus on more creative and productive work. More and more business owners and executives are opting to outsource payroll to ensure the confidentiality of payroll data, which cannot be so well protected when processed internally. Payroll outsourcing shifts a number of payroll tasks to one provider, allowing companies to process payroll faster than ever before. The concept is that by hiring a payroll outsourcer, the company uses a group of professionals to support its payroll needs.
Free payroll software makes it easy to perform payroll without straining your budget. The best programs can calculate employees’ wages and salaries, make tax calculations and deductions, and print checks and payslips. Some of these programs even take over the tax return and offer direct deposits. In this guide, we took a close look at six free payroll services and then picked out our top three recommendations.
How does payroll work?
Payroll technically begins with the employee completing a W-4 form in which they tell the company how they want to be taxed.2 Throughout the year, the information from this W-4 form determines the taxes that the company withholds on behalf of the employee. When the W-4 information is available and the work has begun, the company pays the employee on a regular schedule (e.B. weekly or biweekly). Some workers can be paid at different times depending on their wage status, e.B employees one week and workers the next.
After the employee’s gross wage is calculated for a salary period, the employer must withhold FICA taxes (for Social Security and Medicare) and federal and state income taxes from each paycheck.3 These taxes are sometimes referred to as “payroll tax.” These include, for example, contributions to a pension scheme or health insurance, as well as union contributions or donations to charity. This process of calculating withholdings and deductions, creating paychecks, and distributing payments is called payroll. Payroll also includes overtime, paid (or unpaid) leave, tips, and other specifics of an employee’s salary.4
“Payroll accounting also includes keeping records. For each employee, a separate record must be kept with the amounts paid for each salary period. This information is used for the year-end reports, including the W-2 forms sent to employees.5 In addition, records of employee approvals and any changes in salary must be kept. The wage and salary calculations for an individual employee over time are called proof of earnings. In addition to proof of earnings, all documents relating to pay, deductions and withholdings must be kept for the duration of the employee’s employment relationship.
What is the purpose of payroll accounting?
Whether it’s a large company, a small business or a conglomerate, salaries need to be processed and paid to employees. This is the one function that is crucial regardless of industry, size, geographical location or number of employees. A mistake, and the consequences can range from a dissatisfied employee to heavy losses, which often add up to several million rupees. So, the purpose of payroll is to process and pay salaries correctly, keep employee morale and trust high, and reduce costs for the company.
What are the components of payroll?
Payroll is a business function that includes:
Structuring of the company’s wage and salary policy, including holiday compensation and overtime
- Flexi payment options, allowances, tax saving schemes, etc.
- Definition of salary components such as base salary, HRA and LTA.
- Calculation of the gross salary and the net amount to be paid after deductions.
- Monthly processing and release of employees’ salaries, including any annual bonuses.
- Submission of tax returns and payment of taxes such as EPF, TDS, etc. to the competent authority.
What are the steps in the payroll process?
Payroll accounting is divided into 3 phases: preliminary billing, actual billing and follow-up.
The sub-steps include establishing payroll policies, collecting all payroll data from the different departments, and validating that data. Let’s take a closer look:
Setting payroll policies essentially means standardizing policies for payrolling leave, overtime, attendance, benefits, and other perks. The next task is to capture all the payroll inputs for each individual employee, e.B. the number of days of attendance and absence, the total number of overtime worked, IT reports, data from canteen providers, transport companies and other relevant departments. The collected data is then compared with the company’s policies, checked for the correct format and then forwarded to the actual processing.
This brings us to the next stage of the process. In this step, all the data is calculated, usually with the help of software that provides you with the net amount to be paid to each employee after all necessary deductions.
This final phase includes regulatory compliance through payment to the competent authorities such as EPFO, IT department and ESI, payroll accounting, payment by cash, check or bank transfer, and reporting, which includes the preparation of accurate reports for analysis and other actions.
What is a full payroll?
When the company goes through all the stages of a payroll cycle, i.e. before payroll, during the actual payroll and after payroll accounting, it is called a full payroll cycle.