“Payroll” refers to a list of salary and hourly pay rate information of all employees working under a company. Some companies also refer to it as the total pay an employer owes employees.
Employers are responsible for managing payroll each pay period, so workers receive their salaries properly. Payroll entails more than just a payment.
Payroll processing departments are in charge of processing payroll and paying employees of an organization. When calculating each employee's paycheck, they consider many components, including taxes, hours worked, overtime hours, company withholdings, etc.
What are the Main Components of Payroll?
The payroll system has many vital components; however, three main features must be present to issue a paycheck from the payroll.
1. Pay Information
A company can only provide a paycheck fairly with the employee's pay information. An employee’s payment type, such as hourly, weekly, or monthly, lets a company add a definite and accurate amount of salary into the employee’s bank account each pay period.
All information about an employee's paycheck is detailed on the pay stub, including overtime pay, reimbursement, deductions and withholdings, compensation, the number of hours worked, extra pay, gross pay, etc.
2. Employee Information
The U.S. Federal Law requires employers to provide new hires with W-4 immediately after joining. The new employee must fill out the W-4 Form, including their name, address, Income Tax Withholdings, Social Security Number (SSN), employer details, etc.
The W-4 Form will then be passed to the Internal Revenue Service (IRS) as a record. It will also help companies carry out deductions effectively without receiving a complaint from the employee and make payroll processing faster.
Employers always deduct a portion of an employee’s salary before they receive it because of taxes, insurance, withholdings, and many others. It benefits employees as employers send the amount to the respective departments, and employees remain hassle-free.
Some standard deductions are taken out of the paycheck before each pay period.
Payroll Taxes: The first paycheck deductions are the Medicareand Social Security Taxes. These are mandatory taxes and must be taken out by the employer.
Employee Withholdings: Employers use the W-4 Form to deduct income tax and unemployment taxes. However, the percentage varies from state to state.
Deductions for Benefits: Benefits include life insurance, retirement plan, and health insurance. Usually, most employees do not have to pay the total health insurance percentage as it is split with the employers; however, a portion is deducted from an employee’s paycheck for life insurance and retirement plan.
Wage Garnishments: Wage Garnishments only apply to employees ordered by the law to let their employers deduct a certain amount from their paycheck on each pay period. Usually, Wage Garnishments are deducted to repay personal, student, or consumer loans, medical bills, child support, and any other civil matters.
What are the Other Payroll Components to Consider?
Payroll Processing cannot run smoothly with only three components, even if they are the primary ones. The other required components for Payroll processing are:
Payroll is related to finance; logically, it must be handled by the organization’s Accounting Department. However, as the process deals with the employees of an organization, some organizations choose to have a Human Resources division to manage Payroll. This lets the organization avoid policy or law violations and efficiently manage pay.
How Does Payroll Work?
A company starts employees' payroll when they first fill out the W-4 Form. The form records all the taxations and tracks the deductions split by the company and the employee in a year.
Then, the company calculates the employees’ gross pay and then proceeds to deduct the taxes and other withholdings, leading to the employees’ net income. This process is repeated each pay period, and the company deducts a percentage of the amount from the paycheck before handing it out to the employees.
What are the Steps of Payroll?
The payroll process may seem like simple work, but it has a lot of steps before a paycheck can be issued under an employee’s name. There are mainly five essential steps of Payroll:
Data Accumulation: The HR Department files all the information of each employee’s W-4 Form into the company database to efficiently deduct withholdings and taxes each pay period.
Net Pay Estimation: Net Pay is the amount of salary an employee receives after all the deductions and withholdings have been taken away from the paycheck.
Payment Issuance: After Net Pay estimation, the HR Department double-checks the calculation, finalizes the salary, and issues it to the employee’s bank account or distributes it via a pay cheque.
Filing and Paying Tax: Companies must record the deducted taxes from each employee’s salary and file a report to the state authorities and the IRS. Next, the company must submit the due taxes and other deductions collected within a timeframe to the related departments, which include healthcare and life insurance, IRS, and retirement plan associations.
How to Determine Payroll?
Different companies have different ways of calculating their employees’ payroll. The payroll calculation mainly depends on the variables a company considers when calculating. It can include bonuses, in-house withholdings, compensations, awards, etc.
However, a general rule of calculating Payroll is deducting the deductions from an employee's gross pay, resulting in net income. Nowadays, payroll calculation has become more straightforward with different methods.
Outsourcing Payroll: Companies hire other external organizations experienced in handling payrolls to perform their payroll process over a specific time.
Excel-Based or Manual Payroll: Start-up companies with a handful of employees opt for excel-based or manual payroll processing. They designate an employee who must use an excel sheet to fill and calculate payrolls using a standard template.
Payroll Softwares: Companies use various payroll software for efficient and quick payroll calculation. It is inexpensive, calculates salary and taxes, and some can even file and submit tax reports on behalf of the company.