Payroll is the process of recording and managing wages, taxes and deductions for a business's employees. It's an essential part of any business, ensuring that employees are timely and accurately paid. For small businesses, payroll processing is often handled by a single person, perhaps the owner or a trusted employee. And it can be a lot of work, as any size payroll department does more than simply process employee wage payments.
Processing payroll for each employee starts when they're hired and doesn't end until they are no longer working for the business. Specifics can differ between exempt employees who are typically paid a set salary and non-exempt employees who are typically paid an hourly rate for all hours worked and even their individual circumstances. But generally, employers must track hours worked, overtime, leave taken and accrued, and employee tax status for every pay period. Payroll processing also involves managing payroll deduction items, such as withholding taxes, employee benefit contribution amounts and sometimes wage garnishments. It may also include deductions for retirement savings plan, and it always requires maintaining payroll compliance with local, state and federal requirements.
It's a wonder small business owners can keep up. But no matter how busy they are, their employees must be paid correctly and on time to avoid trouble for all. Inaccurate or untimely payroll payments not only upset employees, but they can also be in noncompliance with local, state and federal requirements. All of this can put a company at risk. To help you better understand these risks, here's a closer look at the payroll process and common challenges.
Any given employee's paycheck involves more than meets the eye. Critical information must be gathered, factored and figured well before you can pay employees their earnings. To help avoid common payroll pitfalls, certain procedures and documents must be in order prior to the start of the payroll process.
To file payroll taxes, most businesses must obtain a federal employer identification number (EIN). This 9-digit number will identify the organization to the U.S. government; some state tax departments may also refer to it. It's free and relatively simple to apply for an EIN at the Internal Revenue Service website.
Some local and state agencies require an alternate identification or tax number and/or specific state unemployment tax number. Check your state and local tax departments for requirements and details.
Employers must collect and store certain information pertaining to employees. This can include the following:
Gross pay is the total amount of an employee’s earnings before taxes and other deductions or withholdings. Generally, an employee’s gross pay reflects either the set salary or the total hours worked multiplied by the employee’s hourly rate. Additional payments for overtime pay, bonuses, commissions or other additional monetary compensation are also included in an employee’s gross earnings..
Exempt employees are those that are exempt from federal, state or local overtime requirements and are typically paid a fixed salary amount per pay period regardless of the quantity of quality of their work. Federal, state and local requirements specify the types of positions that qualify for an exemption and mut be reviewed carefully for compliance.
An employee’s net pay is often referred to as “take-home” pay. Net pay is the amount employees receive of their gross pay after deductions and tax withholdings. Employers rely on Form W-4 to help establish the correct tax withholdings. While what’s withheld from employee paychecks can vary by locale and circumstances, it often includes:
When it comes time to pay employees what they’ve earned, processing payroll with timeliness and accuracy is a necessity. Not only is this important for the employee experience, but employers must comply with federal, state, and local requirements for pay frequency, earning statements, tax remissions and others.
There are four typical pay periods for a payroll schedule:
Some states, localities or bargaining agreements can require specific pay periods for different employees, employers or situations. Therefore, some employers don’t have much of a choice in which employee pay schedule to use.
After you’ve calculated the correct pay due to each employee, you’ll send their paychecks. Traditionally this was often done by one payroll manager who would process payroll manually, hand-write a paper paycheck and deliver it in-person or by mail. While that may still work for some small businesses today, many companies opt for more efficient methods.
One popular option for issuing paper paychecks is to use your bank’s electronic banking services to “cut” or issue paychecks and automatically send them to employees. The drawbacks include mailing delays and potential for delayed or lost paper paychecks.
Most popular is the direct deposit method. This method electronically deposits the funds directly into an employee’s bank account. Furthermore, with proper tracking through a bank or payroll-processing company, it is more apparent as to who has been paid and when.
Payroll processing doesn’t end with paycheck distribution. Employers and human resources professionals must also devote ongoing attention to the following:
Nowadays, many business owners use some type of payroll software to help them with their employee payroll processing. Even those businesses with few employees can enjoy the benefits of a good payroll processing software package.
Payroll processing software can help track employee hours, employee tax information, taxes due and much more. Training costs and payroll software subscription costs are costs to consider. And you may also want to consider an off-site data storage facility to safely backup payroll-related records. Still, it's often a cost-effective solution in the end.
Professional by companies like TriNet offer a simple payroll processing services solution to help you manage your payroll process and help you navigate complex and evolving tax codes. TriNet's administration services and self-service tools help employers and payroll managers spend less time on payroll processing and more time on company growth. Our experts also help you comply with requirements governing pay and payroll taxes in any state. And with direct deposit and debiting, it's easy to go paperless. Employees can easily view their earning statements and Form W-2s, track paid time off, record hours worked including overtime hours, and more, all online. TriNet can even help manage company unemployment benefits and claims handling.
In the end, a solid payroll system can provide invaluable solutions and assistance to businesses of any size or type. Streamlining the entire payroll process can help save time, be cost effective and helps with certain payroll and employment-related taxes.
This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance. This article may contain hyperlinks to websites operated by parties other than TriNet. Such hyperlinks are provided for reference only. TriNet does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on TriNet.com does not necessarily imply any endorsement of the material on such websites or association with their operators.