Payroll can be the biggest overhead expense of the business, and it could get complicated. Furthermore, the process of payroll deductions makes the process even more complicated. However, by understanding every component of the payroll better, you would be able to understand the finances of your business better as well. This will help employers to stay compliant with the labour laws and different payroll deductions.
Payroll is defined as the process of paying salary to the employees. Running the payroll includes calculating the earnings of the employee and deducting different government payroll deductions from the earnings.
Payroll can also be used to refer to:
While recruiting a new employee, collect information about their payroll. Moreover, companies need to withhold certain amounts as payroll deductions to pay the government taxes on behalf of the employees, as well as to pay for employee benefits.
The net pay of the employee is what he/she will get in their bank accounts after all the standard payroll deductions or withholdings for taxes and benefits payments from the gross salary. You may also need to calculate the withholdings for social security taxes, local taxes if any, and medicare taxes.
You can issue payment to the employee either via direct bank deposit or by issuing the paycheck.
An employer needs to submit the tax filing for tax withholdings to the government tax department on behalf of the employee. You also need to report about different contributions such as provident funds, retirement benefits, payments for unemployment, medical taxes, and other applicable taxes.
The employer needs to forward all the benefits and tax payments to the appropriate government tax authorities, provident funds and different assigned benefits providers.
There are multiple components included in the payroll process, which could be divided into 3 sections: employee information, wages and salaries and deductions.
Let us check them out in brief.
You need to gather some information from the employees before you pay them their salary. Your employees need to fill the W4 form. Each employee should fill the form at the time of hire. The W4 form provides information about the income tax deductions of the employee. The form also includes the personal information of the employee, including, their name, social security number and their address. All this information will allow the employer to process the payroll and distribute the salary to the employees. It is recommended that employees should check their tax deductions every year.
You could pay the employees on an hourly basis or an annual salary. They are entitled to receive a fixed amount as pay during every pay period. Hourly employees or wage earners, earn as per the fixed hourly rate. The employee’s annual statement might show the gross pay, overtime pay, time worked, reimbursements and benefits contributions, net pay and additional income.
The best example is that of the reimbursement towards health insurance, which is usually provided after an annual health screening. Another example of salary deductions is the education reimbursement, wherein, the employer compensates the employee for attending courses that are linked to their existing job or for pursuing a college degree.
Deductions or payroll deductions is the amount removed or deducted from the paycheck of the employee as tax and for other purposes. The most common form of payroll deductions includes payroll withholdings, payroll taxes, benefits deductions and wage garnishments.
Traditionally, the employee and the employer pay a certain amount towards the monthly health insurance premiums. The retirement plans more often deduct a percentage sum from the income of the employee and place it under the retirement account on behalf of the employee.
Payroll can be processed manually by your in-house team, or you could outsource your payroll activities to a third party company. The best way to calculate and manage the payroll of your employees is to use appropriate payroll software.
Deciding the payroll could be time-consuming and complicated, which also makes the process of payroll deductions more complex. Irrespective of how employers want to run the payroll, a proper understanding of the basics of payroll can help to track the finances of the business and create a better plan for payroll deductions. Even though expenses on labour could be the biggest expense of any business, running the payroll and the payroll deductions correctly is crucial for the long term growth and expansion of the business.
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