If you own a business and have employees, you need to have a payroll. But what exactly does it consist of?
Generally, payroll can keep track of the employees you pay along with their pertinent information, the amount that you give your employees on a set schedule, and the calculation and distribution of wages and taxes.
What’s in payroll information?
Payroll is a significant overhead, but you have to pay it regardless of business conditions. It may differ from pay period to pay period because of variables like overtime, sick pay, and others.
Here is some of the standard information needed to compute payroll accurately:
- Employee information
Upon employment, all employees need to fill out a Form W-4. From this form, you can get information such as federal income tax exemption, names, address, and Social Security number. All this information is needed to run and distribute payroll.
- Number of hours worked
If you hire hourly employees, you need to track the hours they work to compute the amount accurately. If you have salary employees, you still need a time tracking system to be sure they put in the exact time you’re paying. There are many digital time-tracking programs available for employers.
- Time off
Vacation leave, sick leave and holidays are critical information in a payroll system. If you have a policy that dictates how much time employees can take off, all the more that you need to track this information.
- Salaries and wages
Since payroll is a fixed amount, it’s usually given yearly divided by the number of the pay period. For example, you pay your employees a yearly salary of $31,200. Since they are paid weekly, they will get a paycheck of $600 before deduction (31,200/52 weeks) each week.
Wages, on the other hand, is for hourly employees. With a specific rate, all you need to do is multiply it by the number of hours an employee worked. For example, you pay your employee $10 per hour, and he worked 40 hours this week, you will need to pay him $400 before deduction ($10 x 40 hours).
- Overtime pay
Overtime pay typically starts after the employee has rendered 40 hours in a week. It works for both non-exempt hourly and salary employees. The overtime rate can differ from state to state, so you be sure to check your state’s overtime requirement.
- Fringe benefits
Fringe benefits are still a kind of compensation. You should include all benefits like education assistance, health insurance, retirement plans and discounts for employees in your payroll system.
- Other types of pay
Earnings like tips, commission, and bonuses are still taxable, and therefore have to be included in payroll.
- Tax deductions
You need to deduct taxes from your employees. It can vary depending on their total earning and any withholding allowances that they may claim.
Garnishment is any court-ordered deduction after taxes. It can come from overdue debt like a rent, defaulted loans or child support. The court will notify you if you need to deduct garnishment.
- Net and gross pay
The gross pay is your employee’s total pay. For taxation purposes, the IRS frequently ask for your employee’s gross pay. Also known as take-home pay, the net pay is what the employee gets after you make all deductions from the total pay.
If you need to run payroll, you have three options. First, learn it and run it yourself. It’s a time-consuming job, and unless you’re a trained accountant, you might find it a thankless one. The second option is to hire an accountant or outsource your payroll to an accounting firm. It can be a bit expensive, but it will free up a lot of your time. Lastly, you can use payroll software. The advantage of software is that it’s inexpensive, and it can automate a lot of your payroll program, without needing to hire an outside agent or company.