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.