The backbone of any business is the workers who keep it going. Therefore, properly paying them both on time and accurately is crucial. Payroll is more than just signing a check and handing it off. A lot will go into calculating the amount the employee will receive.
So what is payroll? Here is what you should know:
Who is processed by payroll?
Payroll refers to any payments made by a business for work completed. This can be contract based pay, hourly pay or salary. All those who conduct business on behalf of the company will be counted within payroll.
It is necessary to understand the different types of employees:
Employees
An employee is a worker that is hired by the business to conduct work for the business — for example, a cashier or janitor. By definition, the employer is able to control the work that the employee completes and pays them for it.
Employees will conduct regular and scheduled work on a recurring basis. This person will receive a regular salary or wage. A part-time employee will work less than 40 hours a week, often around 20 hours. A full time employee will most likely work a 40-hour week.
Contingent Workers
These types of workers are often contract workers, independent contractors and consultants. These workers will often not be salaried or have regular scheduled work. They will be used for short-term and long-term projects. They will perform the job they were hired for and often operate outside the business.
If a contingent worker is hired through another firm, it is often the duty of the firm’s payroll to make the deductions as the business using the services is doing so for a specified rate.
What is calculated by payroll?
Payroll, of course, calculates how much an employee or contractor will be paid for their work, but it is also the job of payroll to make the proper deductions to calculate net pay.
Because calculating payroll is a complicated process, it is good to consult more thorough guides dedicated to the nuances such as this one from Onpay.com. Below, you will find a general overview.
Rate of pay
This usually applies to hourly workers, but it can also apply to salaried workers.
An hourly paid employee will be paid a fixed amount per hour they work. This is easily calculated by multiplying the amount of hours worked in a pay period by the hourly amount. Overtime will need to be calculated as well.
A salaried worker will be paid a fixed annual amount paid in equal instalments. The total salaried amount should be divided by the number of pay periods to calculate the gross pay.
Deductions
Deductions are tricky, as they will vary state to state and even county to county. There are universal deductions such as federal taxes and Social Security, but state taxes vary wildly. Following proper tax rates for Social Security and Medicare is crucial for avoiding any mistakes. It is also necessary to calculate for state income tax if the state of operation charges a state income tax. Some states have lower or no state income tax. Some states with an income tax have brackets similar to federal tax rates. It is vital that these variations are all accounted for by payroll.
It is payroll’s job to also account for voluntary deductions that an employee will request. Employees might do this in order to account for multiple jobs or a spouse’s income. Court-ordered deductions for child support or wage garnishment must also be accounted for.
Completing payroll
Depending on the size of the business, it can be best to outsource much of the work to experts. Small- and medium-sized businesses will often save money by outsourcing rather than hiring a full-time worker to calculate proper payments. Doing so can save a lot of resources for the business.
There are numerous programs available for small businesses that prefer to do all their calculations in-house. These programs range from free to more pricey. Before choosing a program or method, you should understand what your business needs are.
