Payroll keeps track of and organizes an employee's annual wages and ensures that companies pay their employees their expected salary (including overtime, vacation days, and paid time off). Payroll includes accounting and record-keeping duties and withholding funds for taxes, including Medicare, Social Security, and unemployment.
Human resources (HR) or accounting usually handles payroll for large-scale businesses. However, the business owner or an associate may also directly manage it, especially if the company is small with fewer employees. Companies of any size may hire a third-party professional employer organization (PEO) or employer of record (EOR) to handle payroll processing and other administrative and HR tasks. This helps keep them compliant and decreases risks involved with missing payments when an employee is owed.
Payroll is the compensation a business owes an employee; it allows companies to keep track of their employees and the money and benefits owed to each one. It is a significant expense and usually deductible from gross income, meaning it lowers a company's taxable income.
Payroll involves compensating workers, but it's not always the same for each period, which is why businesses must invest in the proper software to handle payroll operations. For example, August's payroll may differ from July's because an employee may have put in overtime, taken vacation or personal time off, had sick days with pay, or other variables.
There are three main types of payroll processing:
- Hourly: Hourly payroll is determined by how many hours are worked and is entitled to non-exempt overtime.
- Salary: Salary payroll is based on a set monthly or annual salary and may include non-exempt and exempt overtime benefits.
- Commission: Commission payroll is based on straight commission or commission with a base salary and may include non-exempt and exempt overtime benefits.
Payroll must be established and complied with according to the Department of Labor's guidelines. Failure to comply may result in penalties and fines.
How Does Payroll Work?
Payroll used to be tracked manually through paper and pencil or punch cards. Today, it’s usually conducted through software that automates all the necessary information. To run payroll this way, a business must collect and retain employee information, including the following:
- Social Security number
- W-4 form
- I-9 form
- State withholding form (only in some jurisdictions)
- Bank account information
- Benefits, such as insurance, retirement, etc.
Once this information is collected, it can be entered into an automated system that integrates with other tools to track time and attendance, review and approve time off, calculate wages and deductions, submit or disburse payroll, pay taxes, and retain records. These steps are the same regardless of the software used and remain the same if a manual application is used.
Payrolls are distributed in cycles, such as weekly, bi-weekly, semi-monthly, and monthly.
- Weekly payroll issues 52 checks per year and is typically reserved for hourly employees.
- Bi-weekly payroll distributes 26 checks annually and is reserved for hourly and salaried employees.
- Semi-monthly or monthly payrolls distribute 24 or 12 checks yearly, respectively, and are usually reserved for salaried employees.
What Is Payroll Deduction?
Payroll deductions can be voluntary or involuntary. Both require withholding wages from an employee's total earnings. However, the reason for withholding wages differs between the two.
Voluntary deductions are an employee's choice and can be used to contribute to group life insurance, healthcare, credit union deductions, and other benefits. They can be withheld as pre-tax, tax-deferred, or post-tax deductions.
In contrast, involuntary deductions are mandatorily withheld from an employee's wages. These deductions are mandated by Federal and State laws and are used toward federal, state, county, and city tax levies or bankruptcy, child support, or other court-ordered payments.
What do Employers Pay in Payroll Taxes?
An employer's payroll taxes vary depending on location, whether state or country. Generally, a United States employer is expected to pay:
- Social Security and Medicare: The Federal Insurance Contributions Act (FICA) requires employers to pay into Social Security and Medicare. Social Security comprises senior citizens, survivors (primarily widows and widowers, but may also include dependents), and disability insurance. Medicare involves hospital insurance tax. Rates vary, but an employer must typically pay 6.2% into Social Security and 1.45% into Medicare.
- Federal and state unemployment: Most states require employers to pay into federal and state unemployment, though some may require employees to contribute. Rates range from 0.6%-6%. This is set forth by the Federal Unemployment Tax Act (FUTA), which compensates employees who have lost their jobs.
- Local taxes: Local taxes are based on the location your employee works and lives. Some local taxes are only required when employers do business locally, but they can vary depending on the jurisdiction. Contact your local tax department to find out more about local tax laws.
What Payroll Taxes do Employees Pay?
Employees are responsible for Social Security, Medicare, and federal, state, and local income taxes. Social Security and Medicare require a deduction of 15.3% of an employee's wages, but the employee is only responsible for paying half, translating to 6.2% for Social Security and 1.45% for Medicare.
However, this can vary depending on an employee's earnings. For example, an employee earning over $200,000 may be charged an extra 0.9% for Medicare. Federal, state, and local income taxes are determined based on wages earned during a pay period, usually calculated from W-4 details.
What Is a Certified Payroll?
Certified payroll is a type of reporting that confirms employees are paid according to the Davis-Bacon and Related Acts when working for contractors and subcontractors on federally-funded tasks. Certified payroll must be filed weekly to the U.S. Department of Labor using a WH-347 form. Employers are given seven calendar days to comply and must file these forms regardless if work is continuous or halted.
Certified payroll reports must include the following information:
- Employee's full name
- Employee's identification number (EIN)
- Total hours worked, including regular and overtime
- The day and date of the hours worked
- Pay rate
- Gross amount earned
- Total payroll deductions
- Net wages for the week
- Compliance statement, signed by those supervising the employees
How to Do Payroll?
Many people wonder how to set up a payroll. Whether you choose manual payroll, automated payroll, or employing a third-party payroll service provider, the payroll process is essentially the same.
First, you'll want to apply for an employer identification number (EIN). EINs are to businesses what Social Security numbers are to individuals. They are required to file payroll taxes. EINs are easy and free to obtain and can be done online or by filing a Form SS-4. Next, obtain your local or state business identification number. These numbers will also be used to assess your income tax. How you obtain these numbers varies between jurisdictions.
Once you have these important identifying numbers, you can collect your employee documents. This includes the I-9 and W-4 forms and state withholding allowance certificates. Ensure you also obtain your employees' home addresses and Social Security numbers. After you've collected this information, you can choose how often your employees will be paid.
Finally, it's time to purchase workers' compensation insurance and decide on what additional benefits you'll want to offer your employees. Next, open a payroll bank account to separate and organize your employee payroll from your business account.
If you do payroll through automated software or a third-party provider, you won't have to worry about much else. However, if you're doing payroll on your own, you'll need to follow these steps:
- Calculate hours worked and gross pay
- Process payroll deductions
- Calculate net pay
- Pay employees
- File tax reports
- Document and store payroll records
- Report new hires
What Are Payroll Services?
Payroll service providers take care of payroll processing for you. Most will assume all payroll responsibilities, while others may only assist you with some aspects. Hiring a payroll service provider can benefit businesses by freeing time and ensuring employers remain compliant.
When working with a payroll service provider, you'll need to supply them with specific information, such as:
- Employee personal information, including Social Security numbers and home addresses
- Job information, including worker classification, hire date, W-4 forms, and more
- Company information, including your federal and state tax ID numbers
- Applicable government regulations
The IRS also requires that businesses that work with payroll service providers report to them using Form 8655. Once you've completed these steps, your payroll service provider can work with you to process your payroll.
No Need to Worry About Payroll with Revelo
When a company hires through Revelo, we take care of the payroll and send monthly invoices to secure our developer's payments. With our platform, you won't have to worry about keeping track of your employee's working hours, overtime, or any other variables contributing to their salary. We'll manage everything and configure it into an easy invoice, which we will then submit to you for payment.
Interested in finding out more about how Revelo works? Contact us for a consultation.