Everything You Ever Wanted to Know About Payroll
- The importance of payroll
- How payroll works
- What you need to process payroll
- Understanding worker classifications and compensation
- How to process payroll
- Factoring in payroll taxes and compliance
- Benefits of outsourcing payroll
Payroll. You know it is important. People have to get paid, right? You know it is complex. But do you really understand all that it encompasses? How much time it takes? The attention to detail?
The short answer is A LOT for all of the above. Payroll is a major, time-consuming process that is integral to your business. Payroll requires a major commitment and investment. It is well worth the time and money needed to make it work properly. You can’t afford to short-change your payroll.
Companies that fail to put the proper resources into payroll are jeopardizing their business’ financial well-being, as well as that of their employees. No matter how you justify it, adequate payroll processing is a business need—not a want.
But you know that already—that’s why you are here.
What does it take to make payroll work for you—and we mean really work? The best solution is an investment in your company and your employees through integrated payroll software.
Discover why HR technology integration matters and why you can’t afford to ignore it
Payroll software significantly eases the workload for your company, while also promoting stability, consistency, and peace of mind—leaving more time for you to focus on running your business. It is a commitment to getting things done right and on time—the two things that are now more important than ever.
The Importance of Payroll
Payroll is perhaps the most important financial component of any business. Not only does it encompass the most obvious—employees being paid—it also goes a long way in determining the overall net profit of a company. On top of that, payroll is rightfully subjected to laws, regulations, and ethical considerations. It requires a lot of time and attention to say the least.
Businesses are legally obligated to pay their employees timely and accurately. When a company hires an employee, each party enters into an agreement centered on payment for labor. This is combined with an employee benefits package.
Ensuring this happens, the U.S. Department of Labor is responsible for enforcing everything pay-related. From minimum wage and overtime requirements, to deductions and employee classifications, payroll is an imperative function of any business.
When a business fails to comply with any of these laws, employers are held accountable. This often includes things like:
- Back wages
- Attorney fees
- Criminal or civil penalties
Additionally, businesses are required by federal and state governments to withhold a certain percentage of each paycheck. This may include things like:
- Social Security
- Federal income taxes
- State income taxes
- Disability taxes
Failure to properly manage these taxes can result in severe financial penalties, tax audits, and in some instances, tax liens.
And finally, beyond employee pay and tax considerations, payroll offers unique, detailed financial insight into your company. An accurate payroll is the first step in determining whether or not a business is turning a profit and how it can grow
Should you hire new employees? Can you afford to hire new employees? Accurate payroll data can help your business answer these questions and more.
How payroll works
Starting a new payroll or switching payroll providers can seem like a daunting task. Although the payroll process is largely standardized across the board, it can be very time consuming. It may also differ slightly based on what payroll software you use.
Who runs payroll?
Payroll touches multiple parts of any business, including Finance. But for the most part, payroll is an HR process that is typically run by an HR Professional or Payroll Specialist.
The majority of payroll data originates from HR activities, such as:
- Recruiting and onboarding (new hires)
- Performance management (raises and bonuses)
Additionally, privacy—a crucial element of all things HR—is also important. So, it makes sense that HR would lead the charge when it comes to payroll, too.
By learning the intricacies of everything involved with the payroll process, business leaders can gain a better understanding of the financial health of their organization. This also allows an opportunity to better appreciate administrators performing one of the most essential, time-consuming, and stressful tasks.
What do you need to process payroll?
Prior to running your first payroll, you will need to gather the following information: EIN (Employer Identification Number), state and local ID numbers, employee personal information, employee tax information, and previous payroll records.
EIN (Employer Identification Number)
This is a unique, nine-digit number the federal government uses to identify an organization for tax purposes. An EIN is needed to:
- Pay federal taxes
- Hire employees
- Open bank accounts
- Apply for business licenses and permits
State and local ID numbers
Serves the same function as your EIN, but at the state and local level.
Employee Personal Information
This is pertinent personal information of every employee, including:
- Full legal name
- Current address
- Date of birth
- Social Security Number
In order to process payroll, everything must be gathered of all employees.
Employee tax information
W-4 forms (for full and part-time employees) and W-9 forms (for contract employees) are needed for processing payroll. This information can be collected from new hires during the onboarding process.
Previous payroll records
Maintaining previous payroll records makes switching payroll providers easier and more efficient. Adding payroll history into your new payroll software facilitates more accurately calculated taxes and deductions. This also accounts for more detailed and useful payroll data and reporting.
How do worker classifications and compensation impact payroll?
Since each group comes with its own set of rules and requirements, it is important to classify all employees correctly and how their payments will be set up.
Employee vs. independent contractor
Worker classification is critical because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax. Businesses do not have to withhold or pay any taxes with independent contractors but are required to do so for employees.
Exempt vs. non-exempt employees
According to the IRS, there are three factors that employers must use to determine classification:
- Behavioral control
- Financial control
Misclassification of an employee leads to direct consequences, including making employers liable for employment taxes.
An employee’s status is also determined by three important factors. These include:
- Salary vs. hourly
- Salary amount
- Expected job duties
Exempt employees are freed from overtime and minimum wage rules. Qualifications for exempt status are:
- The employee must earn a salary of $35,568 per year ($684 per week), and
- The employee must have executive, administrative, or professional job duties
Non-exempt employees can be salaried, but are typically hourly. These employees are not exempt from FLSA overtime and minimum wage rules. This status means that companies must pay non-exempt employees overtime wages whenever they work overtime hours.
How to process payroll?
1. Decide how you want to pay your employees
Employees today expect options to be available to them in every aspect of the workplace, including payday. Paper checks and direct deposit are still the norm, but new methods, such as payroll cards, have emerged for an evolving workforce.
Learn more about payroll cards, an emerging payment option for an evolving workforce
2. Determine when you want to pay your employees
A payroll schedule, or pay frequency, is how often you will pay your employees. Typical payroll schedules are weekly, bi-monthly, and monthly. The decision is ultimately yours to make, but some states regulate which pay periods can be used.
This payroll schedule establishes an employee’s pay dates, tax payment due dates, and tax return filing deadlines. Scheduling for special payrolls, including seasonal or annual bonuses, should be decided upfront as general best practice.
3. Track employee time and attendance
Accurate payroll is dependent on accurate employee time tracking. Like payroll itself, time and attendance can be tracked manually by employee. Understandably, this is far more time consuming and prone to errors.
A time and attendance solution that is directly integrated with payroll software offers the easiest and most seamless option for your business.
4. Differentiate types of pay
To ensure accuracy and compliance, employers need to understand different types of pay and when they should be used.
- Gross pay is the amount that employees receive before deductions.
- Net pay is the amount an employee takes home after deductions.
- Bonus pay is additional compensation provided to an employee. Both cash and non-cash bonuses are subject to income tax withholding and payroll taxes.
5. Factor in overtime pay
Whenever a non-exempt employee works more than 40 hours in a single workweek, they are eligible for overtime. Overtime pay is 50% more than an employee’s regular rate and is commonly known as “time and a half”.
If there are no additional payments, such as non-discretionary bonuses or commissions, multiply the employee’s regular hourly rate by 1.5. and apply that expanded rate to only the overtime hours worked.
6. Wage garnishments
A wage garnishment is any legally-binding order that mandates an employer to withhold a specific portion of an employee’s paycheck. This amount must then be sent to whomever an employee owes money. Garnishments can be used for the payment of a debt and are typically things such as:
- Child support
- Student loan default
Once informed of the required garnishment, employers must alert the employee and immediately begin the wage garnishment process. This process includes ensuring payments are sent to the correct agency or creditor. Employers are obligated to factor these into their payroll process or face legal repercussions for failing to honor the court order.
7. Employee benefits contributions
A major component of payroll is employee benefits management. This accounts for all benefits contributions from each individual employee, including:
- Work-sponsored retirement plans
- Health insurance (including dental and vision)
- Life insurance, and
- Flexible spending accounts
When processing payroll, businesses need to calculate and deduct each employee’s individual benefits contributions from each paycheck. Any miscalculations—or late payments—could result in a lapse in coverage for your employees and serious legal consequences for your business.
Factoring in payroll taxes and compliance
Employers have to withhold federal and state income tax from all employees’ taxable wages. These amounts are based on what employees include on their Form W-4.
Employers have several mandatory tasks in handling payroll taxes, including:
- Figuring income tax withholding and other employment taxes
- Depositing all employment taxes according to a set deposit schedule
- Reporting quarterly about their employment taxes covering income tax withholding and FICA
- Reporting annually to employees and the Social Security Administration about employee’s tax payments
- FUTA (Federal Unemployment Tax Act)
- Other state-level reporting
Finding a payroll software that takes care of payroll taxes for you is ideal. First, you will need to give them access to your tax information, including your tax filing identification numbers. Your payroll provider will need to know your depositing schedule for federal income and FICA taxes. You also need to authorize the company to handle taxes for you which can be achieved by filling out Form 8655.
Learn everything you need to know about payroll taxes, including payments, penalties, and deadlines
Benefits of Outsourcing Payroll
As is evident, payroll is a monumental task. If you are still doing payroll in-house, you are severely limiting your company’s potential. Outsourcing payroll and other back-office functions offer numerous benefits across your company from day one.
Save time with greater productivity
Through improved processes and automation, the right payroll software can significantly cut down on the time it takes to process payroll each pay period. This allows business leaders, managers, and HR to spend their time on actually running the business and focusing on helping employees.
Reduce costs with increased accuracy
Manually processing payroll is likely costing your company revenue. Whether underpaying or overpaying, payroll errors result in IRS penalties and waste countless hours correcting. Eliminate this wasted time and money with an accurate payroll software system.
Ensure compliance thanks to industry experts
Partnering with a trusted payroll software company greatly reduces the burden on businesses to remain up-to-date and compliant with the numerous and constantly changing laws and legislation. With tax compliance experts on staff to ensure accuracy, payroll companies like Netchex keep your company safe and worry-free.
Enhance security and privacy
The information gathered by HR for processing payroll demands privacy—ethically and legally. Working with in-house processes or multiple, disconnected systems, often leaves your business vulnerable to security threats and privacy leaks. An investment in payroll software is a commitment to the security of your company’s sensitive information.
Self-service functionality helps engage and empower employees by giving them access to everything they need to manage their workplace experience. Personalized (and mobile) self-service allows employees to:
- Access their own records
- Make changes
- Request PTO, and
- Answer their own questions before contacting a manager or HR.
Grow your business with better data and analytics
Collecting and analyzing data over time improves your processes and business overall by identifying goals and tracking progress over time. Gain easy, instant access to reporting that you need regularly need. This often includes:
- Instant payroll preview
- Payment errors
- Time & attendance updates
- Payroll processing time spent, and
- Up-to-the-minute compliance standards.
Gateway to HR technology
Payroll is the key to a truly integrated HR technology system. A lot goes into payroll, and the right payroll software can cover and connect it all—including time and attendance, benefits administration, performance management, learning management, recruiting, onboarding, and more.
Do you want to get more for your business with Payroll, Benefits, & HR made easy?
Ready for a live demo? Fill out our contact form or
call (877) 729-2661 to speak with Netchex sales and discover how our payroll software can help you.