What Is Payroll?

Payroll is the process of organizing and delivering an employee's wages and ensuring that companies pay their employees their expected salary. This includes overtime, vacation days, and paid time off as agreed upon in an employment contract. Payroll includes accounting and record-keeping duties and, when applicable, withholding funds for taxes, including Medicare, Social Security, and unemployment. 

Payroll is a significant expense and is usually deductible from gross income, meaning it lowers a company's taxable income.

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 in small businesses. 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.

Types of payroll

• 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?

While it may be performed manually, payroll is usually conducted through software that automates processes and deposits compensation. Most payroll software requires a business to 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 for direct deposit
• Benefits, such as insurance, retirement plans, or a 401k

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 pay stubs and records.

Payrolls are distributed in cycles, such as weekly, bi-weekly, semi-monthly, and monthly. 

• Weekly payroll: 52 checks per year, typically reserved for hourly employees
• Bi-weekly payroll: 26 checks per year, reserved for hourly and salaried employees
• Semi-monthly or monthly payrolls: 24 or 12 checks per year, respectively, 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, or other areas designated during the benefits administration process. They can be withheld as pre-tax, tax-deferred, or post-tax deductions. These deductions may be subject to change during open enrollment periods.

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, and other garnishments.

What do employers pay in payroll taxes?

An employer's payroll taxes vary depending on location—both state and country. Global payroll involves further compliance based on individual employees’ home country, but 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. 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 where 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 taxes 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.

How to do payroll

Whether you choose manual payroll, automated payroll, or employing a third-party payroll service provider, the payroll process is essentially the same.

1. Apply for an employer identification number (EIN): These identify businesses and 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. 
2. Obtain your local or state business identification number: These numbers will also be used to assess your income tax.
3. Collect your employee documents: These include the I-9, W-4 forms, and state withholding allowance certificates. Ensure you also obtain your employees' home address and Social Security number. 
4. Choose how often your employees will be paid: Pay frequency will vary depending on exempt or non-exempt employee status.
5. Purchase workers' compensation insurance: In addition to this workers’ comp, decide on additional employee benefits you'll want to offer. 
6. Open a payroll bank account: For organization, tax filing, and legal transparency, separate your employee payroll from your business account.

If you do online payroll through accounting software or a third-party provider, there typically aren’t any other required steps. However, to run payroll on your own, you'll need to follow these steps:

1. Calculate hours worked and gross pay
2. Process payroll deductions
3. Calculate net pay
4. Pay employees
5. File federal tax reports
6. Document and store payroll data
7. Report new hires

What are payroll services?

Payroll service providers take on all, or a portion, of payroll responsibilities for client companies. Hiring a payroll service provider benefits businesses by freeing time, streamlining pay processes, and ensuring employers remain compliant.

Full-service payroll providers require 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 establish pricing and process your payroll.

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International payroll requires considerable attention and ongoing administrative effort. Whether it’s basic payroll management or full-scale benefits administration with accounting services, we’ve got you covered. Customize Revelo’s payroll solutions to fit your needs.