Payroll is the business process of paying employees. Payroll consists of calculating employee earnings and payroll taxes. The term payroll can also refer to the following:
– A company’s financial records of its employees.
– Distributing paychecks to employees.
– Annual records of employee wages.
Payroll can be a company’s largest expense. And the payroll process is complicated. However, if you understand the individual components of payroll, you can better assess your business finances. It’s also a great way to make sure you’re in compliance with federal and state tax and employment laws.
Steps for processing payroll:
- Enter data
When you hire a new employee, you must record their payroll information on Form W-4. Employers must withhold amounts for federal and state taxes and may withhold money to pay benefits.
- Calculate the net wage
The employee’s net pay is the gross pay less withheld taxes and benefits. They also calculate withholdings for Medicare taxes, Social Security taxes, and any applicable local taxes.
- Dispense payments
You must pay the employee’s net salary by direct deposit or by issuing a paper check.
- Report taxes
You must file a tax return for federal tax and state tax withholdings with the IRS and state tax office. They report pension contributions, state unemployment benefits, Medicare taxes, and Social Security taxes to other agencies.
- Deduct and pay taxes
You must forward all tax and benefit payments to the tax authorities, pension companies and other benefit providers.
Essential components of payroll accounting:
There are many components to the payroll process. We have divided each component into three categories: Employee Information, Wages and Salaries, and Deductions.
- Information for employees
Before employees get paid, they need to give you some information. First, they must complete Form W-4. All employees should complete this form as soon as you hire them. Form W-4 contains information about an employee’s federal income tax withholding. It also contains the employee’s personal data, such as name, address and social security number. All of this information will help you process payroll and distribute paychecks. The IRS recommends that employees review their withholdings each year.
- Salaries and wages
The second category is the salary of an employee. Either pay an employee an annual salary or an hourly wage. Salaried employees earn a fixed amount per pay period. Wage earners, or hourly employees, earn an hourly rate. An employee’s pay stub may show gross wages, hours worked, overtime pay, contributions to benefits and reimbursements, additional income, and net wages.
- Gross salary
Gross pay is the total dollar amount you pay an employee before deductions are taken. Gross salary is the amount an employee earns “before taxes.”
- Staff time
Employee time refers to the number of hours an employee has worked in a pay period. Most companies require hourly employees to keep track of their time. However, some employees may also record time when they receive overtime pay.
- Overtime pay
Most non-exempt employees are eligible for overtime pay as set forth in the Fair Labor Standards Act (FLSA). The FLSA specifies that overtime pay for a non-exempt employee is equal to the regular rate of pay multiplied by 1.5. The overtime pay rate applies to hours a non-exempt employee works in excess of 40 hours in a workweek. Another common term for overtime is “time and a half”. Normally, exempt employees do not receive overtime pay. Exempt employees include anyone who earns more than $684 per week or $35,568 per year. The U.S. Department of Labor (DOL) enforces the FLSA. Your state’s labor laws may set overtime pay rates and requirements for your workforce.
- Benefit contributions and reimbursements
Additional benefits are contributions that you can make available to your employees. The most common types of benefits include health insurance, retirement plans, and paid vacation. However, you will need to deduct many of the most common benefits from the employee’s pay. Upon presentation of documentation, the employee is entitled to a refund of the amounts deducted. An example of a benefit contribution is health insurance reimbursement for participation in an annual health screening. Another example is reimbursement for continuing education, where you can reimburse an employee for taking courses related to his or her job or for earning a college degree.
- Additional income (tips, commissions and bonuses)
Additional income may apply to service employees, salespeople, and anyone who is eligible for bonuses. The most common types of extra income include tips, sales commissions and bonuses. Local and state laws may tax some forms of additional compensation at a higher rate. Tips are a special kind of additional income. Depending on your state’s minimum wage laws, tips can contribute to an employee’s total hourly wage. According to the FLSA, employees must earn more than $30 in tips in a month for them to affect their pay rate. In addition, the employee’s tips and wages may not fall below the minimum wage. A state’s minimum wage may differ from the federal minimum wage, which is $7.25 per hour. The federal minimum wage for tipped employees is $2.13 per hour plus tips to reach $7.25 per hour.
- Net wage
After you subtract all deductions, the remaining amount is the employee’s net pay. It’s also called “take-home pay.” Net pay is the amount employees receive on payday.
Deductions are any amounts deducted from an employee’s payroll for tax or other purposes. Common deductions include payroll taxes, payroll deductions, wage garnishments, and benefit deductions.
- Taxes on wages
Payroll tax is the most common deduction. They withhold these taxes from an employee’s gross pay. Payroll taxes refer to Social Security and Medicare taxes. “FICA tax” is another common term for these taxes. FICA is the Federal Insurance Contributions Act, which established the Social Security tax. The FICA tax rate is 7. %.. The individual Social Security tax rate is 6.2% %.and the Medicare tax rate is 1. %..
- Deductions from payroll
These deductions relate to income tax and unemployment tax. The employee’s W-4 determines how much you should withhold for federal income tax purposes. Both income tax and unemployment tax vary depending on your location. There are federal, state, and sometimes local income tax rates. Federal and state laws determine unemployment tax rates.
- Wage garnishments
Wage garnishments are not a common deduction. Employees whose wages are garnished do so pursuant to a court order on a credit or civil matter. Types of wage garnishments include
– Payments for loans, medical bills, or personal loans.
– Consumer debts or bankruptcy payments.
– Child support or alimony payments.
– Federal Student Loan Repayments.
The amount to be withheld depends on the court order. Federal law establishes benchmarks for wage garnishments based on an employee’s total income. State laws on wage garnishment vary.
- Deductions from social benefits
Benefit deductions may include health insurance costs, 401(k) contributions, life insurance, or other fringe benefits. Unlike benefit contributions, these benefits have a cost to the employee in exchange for a service or coverage. Typically, employers and employees pay a portion of the monthly cost of health insurance. Retirement plans often take a percentage of the employee’s income and put it into a retirement account in his or her name. Benefits you take before taxes are withheld are called “tax deferred.”
401(k) is a common example because employees pay taxes when they withdraw funds. Other benefits are taxable, like a Roth 401(k). You deduct taxable benefits from an employee’s gross salary after you have deducted taxes. Review local, state and federal laws on taxable benefits to ensure your business remains compliant.