Editorial

07 Apr 2022

What Is Payroll?

Kelsey Kaczynski

Payroll is the process by which an organization or business compensates its employees for work completed during a set amount of time or by a certain date. As HR professionals, it is one of the most important tasks put before you. That’s why understanding the payroll process, its best practices, and guidelines are particularly key if you're a HR executive. However, understanding payroll is important for any kind of employee who values their time and is interested in showing initiative in regard to their finances.

Most large corporations task their human resources department with the responsibility of payroll, however other corporations outsource payroll to specialized firms. Sometimes, smaller companies will delegate payroll to one specific individual in their firm. While the people who carry out payroll may vary from company to company, the importance of the task itself will not.

Without efficient payroll processes, a business will not be able to pay employee wages regularly, nor will they be able to handle taxes responsibly. This means that employees will not receive financial compensation, whether it be in the form of paydays, paychecks, or direct deposits into their bank accounts, for their work.

Essential Payroll Components

Payroll can be complex. Before we outline our four-step procedure to payroll best practices, let’s outline a list of essential components which you will require to complete it effectively, complete the correct payroll deductions and income tax withholdings, and get your employee’s paycheck in on time each month.

  • W-4 form
  • Income tax files
  • A complete list of employees
  • Hourly wage information for each tier of employee
  • Overtime payment details
  • Health insurance information for each employee
  • Your own company’s tax information

How Does Payroll Work?

Payroll covers all aspects of employee pay and compensation preparation. So if you are an HR executive or payroll specialist, you are the point of contact for employees for everything from receiving their pay stubs, knowing their pay rate, and understanding their direct deposit details.

Calculating payroll involves many components and can often be complex. However, it can be split into four separate stages. We’ve taken the liberty of outlining the basic steps and requirements that take place in each step below so that you can fully understand what boxes you need to tick to implement a fully functional payroll procedure within your organization.

1. Collect data

After an employee and employer have decided upon a contract, struck a rate of pay, and legally commenced their working relationship, employees fill out a w-4 form which tells the business details about how they want to be taxed. Technically speaking, this marks the start of the payroll process.

The W-4 form tells the employer what taxes it should be withholding and later paying on behalf of the employee. For example, it will include all information on the employee’s medicare, social security tax, local taxes, IRS, FICA tax, federal income taxes, employment taxes, and child support requirements and responsibilities. These taxes are known as payroll taxes and the process which calculates what finances the employer must withhold and deduct is known as payroll processing.

2. Calculate net pay

Once you have received all tax information from your employees, you will be able to calculate what finances you should withhold from them each month in order to abide by your local best taxation practices. The money which you agreed to pay them in their employment contract is known as the gross pay and the money you actually pay them after taxes is known as their net pay.

3. Issue payments

Now it is time to set up a payment routine for issuing your workforce with their net payments each month. Most companies plan to do this at the beginning or end of each calendar month, however, others deliver payments bi-monthly. Whatever timeline you decide works best for your company, remember to be transparent about it to your employees and be sure to notify them in regard to any changes to the payment schedule.

4. Report taxes

The record of all the calculations for all employees is called a payroll register. The totals of this register are fed into the overall financial statements for your business. It is important that your company puts aside and keeps a record of the taxes required for each employee so that your workforce and organization can file an accurate tax statement at the end of the year and abide by your state laws.

5. Withhold and pay taxes

At the end of each business year, your organization must complete its tax payments and the relevant tax duties of its workforce by delivering the tax payments to your government. This marks the official end to the payroll process and it begins again in the new year.

a man gives a woman an oversized dollar

Payroll Best Practices

No matter the size of your business, operating an effective payroll system should be your priority. The way you approach payroll should be deliberate, efficient, and updated regularly. This ensures that your business stays on track in terms of its goals, but also legally, in regard to correct tax and company data procedures.

The practices listed below should be noted and kept at the forefront of every employee, HR official, tax accountant, and independent contractor/freelancer's mind so that they are entitled to the correct compensation each month but also are equipped to file legally sound tax returns each year.

  • Pay employees/send invoices on time

An effective payroll system is one where all checks and balances are performed regularly and in good time. If you do not perform your expected responsibilities on time then you risk appearing unprofessional and losing the trust of your employees/employer/contract holder.

  • Be accurate

Keeping on top of all your payroll information can be tricky, but it’s necessary, so make sure to have a clean and organized system when it comes to all of your tax filing dates, information, and personal details to make for an effective payroll system.

  • Confidentiality

Much of the information required for the payroll process is incredibly confidential. If you are handling this information on behalf of your workforce or even yourself, always make sure to handle it securely. If misplaced it could mean a serious breach of company data.

a hand holding a pen

Ways To Process Payroll

As explained above, there is a multitude of steps, information, and care required to perform an accurate payroll process. However, in the same way, that there are boxes to tick to complete payroll, there are ways to complete it.

We’ve outlined some of the ways in which you or your organization can complete your payroll below.

1. Manual payroll

Completing payroll manually can be complicated and time-consuming, even for small business owners. For this reason, we generally advise people to opt for one of the below options instead.

2. Outsource payroll

Many businesses outsource their payroll functions to an external body. This can be beneficial as it means they do not have to a body of payroll trained employees in-house or invest in an expensive payroll system. This is particularly a popular method for freelancers.

3. Payroll software

For companies or organizations that don’t have the finances or interest in outsourcing payroll, we recommend investing in software that can run the procedure for you. This method of payroll has all the benefits of outsourcing without the associated costs. For example, your calculations and deductions will be accurate, your payslips will be automated and your taxes will be prepared for you, but you won't be paying a large sum of money to pay a business to do this, instead, it will be completed by your own chosen software.

In fact, if you’re searching for a payroll software that’s easy to use, a breeze to integrate, and dynamic, we’ve got you covered. We’ve designed a state-of-the-art payroll software that makes payroll instantly manageable for a company of any size, so make sure to check it out.

Conclusion

Payroll processing can be a complex and time-consuming procedure, however, it is a vital component to running any successful business. For this reason, we advise keeping this article on hand so that you can reference our notes on the procedure any time or better yet, take a look at our payroll software so that we can offer you support with your payroll consistently.

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