Payroll Basics

Are you ready to start running payroll for your business? Payroll is a complicated process: you need to take it step by step. It’s more than just paying employees for the hours that they’ve worked; there are taxes, insurance, and other deductions involved. Here’s an overview of what you need to know.

It’s important to note that there are many regulations and laws regarding payroll. While this offers a brief overview of payroll basics, you should look into this further with a human resources expert.

Paying Your Employees

Paying employees begins with determining whether your employees are salary or hourly. Salary employees will be paid the same amount every pay period. Hourly employees will be paid based on the amount of hours they work. Only certain types of employees can be classed as salaried. Regardless, they need to be paid at least the state minimum wage (unless they are in specific tipped positions).

In addition to determining whether your employees are salaried or hourly, you also need to determine the benefits you want to offer them. These benefits include profit-sharing, annual bonuses, commission, and the amount of overtime they receive.

On a practical level, you can pay your employees through direct deposit or checks. Most people are now switching over to direct deposit, because it’s easier, but it does require that you collect checking account information from your employees.

Withholding and Paying Taxes

This is the most complicated aspect of payroll by far. In order to pay your employees, you need to withhold taxes from their paychecks. This includes federal taxes, state taxes, and social security. Every employee pays in a portion of their paycheck for these taxes, and you need to calculate the amount based on their deductions.

These taxes are taken out of the employee’s paycheck, and then they are paid to the correct departments. You will need to pay out to the federal government, state government, social security, Medicare, unemployment departments, and so forth. These payments will include not only the employee portion of the taxes, but also the employer’s portion of the taxes.

Reporting to the Government

As an employer, you’re responsible for employer taxes. This means that your employees cost more than just their pay and their benefits: you’re also paying additional taxes directly to the government, as well as things such as unemployment insurance, and workers compensation insurance.

On either a quarterly or yearly basis, you’ll need to file a form with local, state, and federal governments, regarding the amount of pay that you sent out, and the amount of payroll taxes you owed and paid. This is similar to an end-of-year tax return: if you owe anything additional, you will pay it now. Depending on how many people you pay out, you may need to complete your payroll tax reconciliations more frequently.

Insurance, Garnishments, Retirement Accounts and PTO

In addition to taxes, there are a few other things that you may need to attach to a paycheck. They are:

  • Insurance payments. Your company may allow employees to purchase additional riders for their insurance, or upgrade their insurance packages. If so, the insurance payments will generally be deducted from their paychecks, and then forwarded to the relevant insurance company. If your company is of a certain size, you will need to offer health insurance to your employees.
  • Wage garnishments. An employee may have a garnishment against them if they owe child support or another type of legal debt. Sometimes these garnishments are voluntary: it’s easier for the employee to track their own payments this way. As an employer, you’re required to complete these garnishments, by deducting the money from their bank account and putting it towards their debt.
  • Retirement accounts. When employees put money into their 401(k) accounts, it’s generally through their paycheck. If you have an employee match, you’ll likely be putting money into their retirement account as well. Money will need to be taken from their paycheck and directed appropriately during the pay period, so it begins accruing gains.
  • Paid time off. Most companies will accrue PTO on a per paycheck basis. Based on the amount of hours the employee works, they gain “paid time off,” which they can use for things like sick days, personal days, and vacation days. Not every company does PTO the same, but most do link it to the employee’s paycheck, because it’s value that the employee has accrued.

As you can see, a paycheck gets very complicated. A single paycheck could include local taxes, state taxes, federal taxes, unemployment insurance, workers compensation insurance, health insurance, wage garnishments, 401k contributions, and paid time off. These deductions and allocations are generally made clear on the pay stub itself, so employees can reference how much they grossed, what was deducted from it, and ultimately what they netted.

Using Payroll Software

Payroll solutions and accounting solutions can make the process of running payroll easier. If you choose to do your payroll yourself, these solutions will automatically calculate the amount of withholding for each employee, as well as the amounts that need to be paid. They will then generate the relevant tax forms for you.

Correcting Mistakes With Paychecks

Occasionally, a mistake does occur with a paycheck. If mistakes occur regarding the amount of taxes that you paid on the employer side, you’ll need to correct it. If mistakes occur regarding the amount of taxes that were paid on the employee side, it’s usually up to the employee to correct.

Likewise, underpaying an employee can come with some significant consequences, and will need to be corrected. However, if you overpay an employee by accident, the employee is still obligated to return that money.

Maintaining Labor Compliance

There are a number of labor regulations that need to be followed regarding payroll, such as displaying labor law posters inside of the business so that employees are aware of their rights. These labor law posters usually have both state and federal minimum wages posted on them, to make sure that you are compliant with these regulations.

Many small business owners struggle with hiring and paying employees. There’s an answer. Payroll can be easily outsourced to another company, to make the entire process easier on you. Consider hiring a payroll company if payroll is too time-consuming for you to complete on your own.