What is Payroll?

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If your business has employees, you must, absolutely must run payroll. It’s an often common term in the workplace, “run payroll!” But what is payroll? It’s a term that refers to various concepts. To employees, it is the documentation of their compensation and the process of calculating those wages.

If it is a relatively new concept to you, this guide should help you understand all there is to payroll and even help you prepare for it to some extent.

What is Payroll?

Payroll is simply the process of paying employees. Employers must handle payroll each pay period so employees receive their wages. But it is more than just a paycheque. There are many moving parts to a payroll as follows;

Employee information

When you first make a new hire, you have to add them to your system and ensure they’ve completed the necessary tax forms before you can add them to your payroll. This form provides information such as name and address of the employees, their withholding amounts among other crucial detail. To keep this information accurate and up-to-date, you should revisit it each year with the employee in case their exemption or income status change which might also change their tax status.

Capture employee hours

Another aspect of payroll is tracking the hours of each employee which may vary according to the type of employee. If the employee is paid hourly, then you’ll need to keep track of all the hours completed to ensure you pay them accurately. Hours also are important to consider for overtime if the employees are entitled to such pay.

You might not need to keep track of salaried employee hours. However, you might want to keep track of hours taken off for vacation, sick time and holidays so that employees receive the amounts they’re entitled to according to your business’s polices.

Salaries, wages and gross pay

The whole idea behind payroll is to facilitate payment of salaries and wages, and calculate gross pay. Payroll employees are paid according to salaries or wages. Some may also receive tips, commission or bonus pay which must be included when distributing pay.

Salaried employees are given a yearly salary which is then distributed according to the payroll schedule. For hourly employees, the gross pay varies according to the hours worked multiplied by the pay rate per hour.

In businesses where overtime is allowed, the overtime hours often have a different hourly rate and the total number of overtime hours should be added to the employee’s gross pay.

Deductions and withheld amounts

 Another facet of payroll is to determine deductions and withheld amounts. Deductions refer to the amount subtracted withheld from employee wages. Much of this information can be informed by the tax forms the employee fills when they enrol and include everything from tax at different levels right down to NHS and social security. Union contributions and garnishments for overdue debt can also be included in the deductions.

Net pay

Net pay is the employee’s pay once all taxes and deductions have been subtracted from their gross pay. It represent the amount of money an employee receives following payroll processing. Usually businesses are expected to report gross and net pay amounts to ensure the deductions and withholdings are done properly.

When it comes to payroll, you may hear phrases like;

  • Running payroll – this is the process of calculating and distributing wages and taxes for every employee
  • Employees on payroll – this is the list of employees you pay, along with their information. Keep in mind that it does not include independent contractors.
  • Payroll expense – the amount your business spends on employee wages and taxes. These expenses must be recorded in your accounting books.

How to Run Payroll

Now that you have an idea of what payroll is, it’s time to switch to how to handle payroll. There are three payroll solutions when it comes to running payroll.

Do payroll by hand

This is the most time-consuming but least expensive payroll option. It requires you to learn the ins and outs of payroll. You must calculate taxes and other deductions manually. You can use tax tables to calculate withholding tax. The process followed depend on the tax jurisdictions you’re in.

The secret to doing payroll by hand is to keep organised and detailed records. These should be kept somewhere safe and secure. You can try to use a spreadsheet to show gross pay, taxes, deductions and net pay.

Last but not least, you’re responsible for filing and depositing taxes with the relevant government agencies if applicable. Ensure you set calendar reminders to avoid penalties and late fees.

Outsourced payroll

Outsourced payroll is the most expensive, but least time consuming. It allows you to free up precious time spend doing payroll by hand, but the expense of money. You should carefully consider when outsourcing your payroll is within your budget.

You might outsource payroll to a payroll accountant or professional employer organisation. Whichever option you choose, the ideas is that they handle the entire process for you, from calculation right down to wage distribution.

Use payroll software

Using a payroll software is the middle ground between doing payroll by hand and outsourcing payroll. The software can be inexpensive and easy to use. It calculates wages, and taxes so you don’t have to. If you opt for a full service payroll software, you don’t need to file or deposit taxes either. The system will do it on your behalf.

Advantages of using a Payroll software

Manual payroll systems are much slower than automated procedures. With software payroll systems, the employer can use a computerised system that allows the tabulations and calculations to be completed in a fraction of the time used to do it manually. Also, the software has a higher ability to calculate legal deductions. Other benefits of a software include;

Cost effective

Taking control of your payroll using a payroll software saves you time and money. It’s more affordable than hiring someone else to keep your records and it is a great way to save money. Especially, once you start using the software.

Save time

With a payroll software, you’re saving money and time. The software helps to accelerate all the aspects of the process with many automated functions. This allows you to get the most done within the shortest time.

Easy forecasting

With a payroll software, you can view and control all payroll expenses, you can graph the financial data to help you create a forecast. If you have an idea of your business’s performance, it will be easier to choose when you need to employ additional workforce for the company and make the necessary adjustments.

Closing Remarks

Evidently, payroll is something that most growing businesses have to familiarise themselves with. Although quite dreaded in the past, technology revolving around this practice with the option of outsourcing has made it much more bearable and productive. You should look at payroll as the backbone of keeping your employees happy and satisfied.

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