The Payroll Process: More Than Meets the Eye

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.

Preparing for payroll

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.

Get an employer identification number

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.

Collect employee information

Employers must collect and store certain information pertaining to employees. This can include the following:

• Personal information needed to prepare a payroll record includes name, date of birth, Social Security number and address.
• New & existing employees must fill out the IRS Form W-4, and state versions where applicable, so employers can calculate the appropriate federal, state and local withholding taxes. Here, employees state their tax and marital statuses and how many allowances they'll take. And, a new Form W-4 is needed when employees make changes to their tax withholdings.
• The U.S. Citizenship and Immigration Services' requires that all employees have a timely completed Form I-9 on file. The Form I-9 is used for employment eligibility verification and documents the identity and employment authorization eligibility for an employee.
• A medical insurance health and welfare enrollment form (if offered) documents correct, authorized payroll deductions for benefit costs.
• Retirement savings plan forms and signatures, for those who offer a 401(k), SIMPLE IRA or other plan, will permit you to deduct contributions and remit to the provider on their behalf.

Calculating gross pay

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.

Deducting taxes and other withholdings

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:

• Federal deductions including Social Security and Medicare
• Federal, state and local income tax withholdings
• Medical, disability, life insurance, retirement savings plan, and other voluntary deductions

What’s involved in the payroll process

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.

Payroll schedules

There are four typical pay periods for a payroll schedule:

1. Weekly pay may be appropriate for manual labor jobs. The pay is more frequent and may help employees manage their personal finances.
2. Biweekly pay may be good for non-exempt workers, as overtime is typically calculated by the workweek.
3. Semimonthly pay may seem the same as bi-weekly, but it’s different. Typically, employees are paid on fixed dates, like the 15th and last day of the month . Many industries and government employers use this schedule. This can simplify payroll for exempt employees. But payroll hours can vary depending on what day the month ends, adding complexity to non-exempt employees’ payroll.
4. Monthly pay is the least amount of time to handle employee pay, as you only process once a month.

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.

Preparing and distributing paychecks

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.

Post payroll

Payroll processing doesn’t end with paycheck distribution. Employers and human resources professionals must also devote ongoing attention to the following:

• Accurate records must be kept, updated and safely archived. Without accurate payroll records, a business may risk penalties and liabilities on multiple levels.
• Local, state and federal taxes withheld need to be sent to the proper government agencies according to set schedules. It’s just like the deadline for filing your personal tax return and there are penalties for missing that deadline. Failure to send collected payroll taxes may result in penalties and or fines for noncompliance.
• Each year, employers must issue and file W-2 forms showing earnings paid, taxes withheld and benefits provided for the prior year.
• If anything changes that results in a change to employee pay, the employee must be promptly notified. Notifications should comply with local and or state requirements. Again, failure to do so may result in penalties. To help avoid issues, meet the time requirements and record when you send notices to employees.
• Errors and oversights regarding impacting paychecks should be addressed upon discovery to help reduce the risk of noncompliance actions against your business.

Payroll software

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.

Payroll services

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.