What is Payroll? How to Prepare, Calculate, and Process It

Any employee expects their wages to be paid on time. After all, salaries are typically one of the main reasons employees work. Timely remuneration not only leads to job satisfaction but also boosts employee morale. Employers should prioritize payroll to ensure employees are paid on time and business functions run smoothly.  

This is a critical function in any business, small or large. It is the lifeblood of any company as it ensures financial and operational stability. With a seamless payroll, employees are guaranteed to receive their payments on time, fairly, and without complications.

While payroll is mainly about payments, it's also about many other things. For instance, it can foster trust and help both employers and employees honor their commitments, ultimately enhancing loyalty. This article explores everything you need to know about payroll and more. Take a look:

What is Payroll?

Payroll involves compensating employees for a specific period and on a particular date. It includes tasks like preparing payroll, calculating wages, withholding taxes, and other deductions. Payroll ensures timely and accurate salary payments, encompassing various responsibilities beyond just issuing pay slips and paychecks.

Why is It Called Payroll? The History of Payroll

The name payroll goes way back to the 17000s, the early days of business and commerce. Before then, in medieval England, salaries and expenditure records were handled by stewards who wrote them down on parchments, often called 'rolls.' They listed the names and salaries of each employee on these parchments, a practice that spread across many industries. The payment details of employees were recorded on the parchment rolls, hence the name.

In 1799, business became more complex, and industrialization saw the introduction of income tax. This meant that employers needed a more comprehensive system to ensure accurate documentation. Additionally, more and more labour were being employed, hence the need for reliable documentation. As more businesses increasingly demanded accurate documentation, systems were developed.

The term comes from two words: "pay" and "roll." Since businesses no longer use rollable parchments, the term has a new meaning. Pay means remunerating staff for work they've done, and roll implies the time to pay employees; it is often periodical. Most employers pay their staff once a month.

Is Payroll a Human Resource or Accounting Function?

When it comes to the HR and accounting functions regarding payroll, many people have mixed feelings. Some feel it is the HR's responsibility, while another fraction deems it the accountant's role. Both perceptions are correct.

Payroll in HR means the process of paying workers for their labor. HR professionals oversee this to ensure employees get their salaries on time. It involves calculating, deducting, and withholding wages and taxes. When employees fail to earn salaries or in case of any errors, they usually go to HR.

In accounting, payroll involves all processes involved in financial transactions regarding employees’ salaries. An accountant records all expenses, tracks tax and insurance contributions, and manages the payroll. They also perform audits, reconcile accounts, and prepare financial statements.

The Importance of Payroll

There are many reasons why payroll is essential for businesses, regardless of size or industry. They include:

Compliance

Any business must comply with tax regulations and labor laws. For instance, they must ensure that employees are paid accurately and on time. Additionally, they must record and remit all tax deductions, failure to which they might attract fines and even legal battles. Proper processing and management ensures businesses comply with tax and labor laws, avoiding fines and penalties.

Time-Saving

Imagine the hustle of recording all employee salary details and tax deductions manually. It is not only tiresome but also increases the chances of errors. With suitable automated systems, businesses can manage their payroll processes quickly and efficiently. Additionally, individuals who run multiple businesses don't have to manage theirs separately. Instead, they can use one system to handle all their business' processes. This also allows them to focus more on growing their business.  

Talent Retention

Businesses can ensure timely and accurate employee remuneration with the right system. This reduces the chances of employee turnover, which can significantly affect business. Low employee turnover also means businesses get to retain their talents.

Risk Mitigation

Entrusting your payroll processes to dedicated professionals reduces the chances of costly errors. The right service provider ensures accuracy and compliance, thus eliminating risks that can harm the business.

Company Reputation

Nobody wants to work for a company that pays its employees late or doesn't pay them the right amount. This can ruin a company's reputation, and a negative image can affect a business. For instance, such companies risk high employee turnover and fail to attract top talent.

What is a Payroll System

A payroll system is an application used to manage, automate, and expedite employee payments. The system calculates employee salaries and taxes, tracks employee work hours, and processes their payments. While these tasks can be done manually, they can be done using an automated payroll system to eliminate time wastage and errors.

Types of Payroll Systems

There are four distinct types of payroll systems. They include:

1. In-house Payroll

Derived from its name, in-house payroll is usually managed internally. Employees within the company, or even the business owner, assume the payroll processing role. Every aspect of the business is managed internally and, in some cases, manually. It is perfect for small businesses that are just starting.

1. Agency-Managed/ Outsourced Payroll

Unlike in-house, businesses can also seek payroll services from a professional agency to manage all the tasks on their behalf. These agencies often understand it and only hire well-informed experts, guaranteeing accuracy and compliance.

However, it is essential to note that outsourcing payroll services means businesses must release their employee data to the agency.

1. Professionally Managed by Bookeepers or CPAs

Conversely, payroll can be outsourced to bookkeepers and Certified Public Accountants (CPAs). Such experts ensure accurate management. However, SMEs needs to ensure all operations are covered.

1. Software Managed / Cloud-based Payroll

Also called online payroll, this type entails using an automated online portal. Data entry, time tracking, tax filing, calculations, and recordkeeping are managed in the cloud.

Components of a Payroll

Payroll components are several elements related to employee pay. These elements play a huge role in determining an employee's net salary from an employee's gross pay. Some elements may vary with countries because of different labor regulations. They include:

Employee Information

Gathering employee data is the first step. Employees must fill in their details such as name, role, and bank account information; they can also include work hours and track attendance, among other information required by the company.

Salary

It is the main component of a payroll. It is usually distinguished between basic and gross salary. Basic salary is the total earnings of an employee without additional incentives or making any deductions. On the other hand, gross salary is the basic salary plus all the additional incentives.

Overtime

Overtime is the money an employer pays an employee for working extra hours. It is usually calculated separately from their basic or gross salary. Please note that overtime is only applicable to employees entitled to it.

Incentives

These can include bonuses, allowances, commissions, and any other benefits like pension contributions. They are dependent on the employer; therefore, they vary with companies.

PTO Compensation

When calculating employee gross salary, some employers consider paid leaves such as holidays, vacations, sick leave, parental- leave, maternity leave, and annual leave.

Employee Contributions to Social Securities’ Funds

Such contributions are not paid to the employee, but they are mandatory. In most countries, they are remitted to the government, and they vary among countries. Some of these payments include pension insurance, health insurance, housing insurance, disability insurance, etc.

How to Prepare Payroll

Payroll preparation encompasses several steps to ensure accurate payments and compliance. The following are essential payroll preparation steps:

Gather Employee Information

Before processing payroll, employers must first collect crucial employee information. They will need details such as name, Insurance numbers, address, and bank account information. In case of additional financial information, employers should notify employees about it. Besides financial information, employers also need employee information on worked hours and salary rates. They must also factor in aspects such as incentives, if applicable, to ensure accurate salary disbursement.

Choose a Payroll System

Several factors, such as the size of the business, business growth, employee benefits, taxes, and federal laws, can determine which payroll system to use. As mentioned earlier, there are four types of payroll systems. Therefore, businesses should look at the mentioned factors to choose a suitable payroll system.

Establish a Policy

Once a payroll system is established, create a policy ensuring proper processing and management. It does not matter whether one is using an in-house or outsourced one. Essential elements to consider in the payroll policy include:

1. Pay Dates

This is the length of the pay period, for example, monthly or weekly. It should indicate when employees should expect their salaries.

1. Payment Methods

It should indicate the method employers are planning to pay their employees. Examples include direct deposits on their bank accounts and paychecks.

1. Deductions

Include procedures for paying the necessary deductions such as taxes and insurance. It would also help to mention regulations that require employees to pay taxes and deduct insurance.

1. Benefits

In the case of employee benefits, employers should indicate them all to help them understand the total amount to expect.

How to Calculate Payroll

Once all the above preparation steps are done, the next step is to calculate employee salaries for each worker. When calculating, factor in the following:

Gross and Net Salary

Employers must factor in gross pay and net pay to ensure transparent and accurate compensation. Gross income is the total salary before any deductions, while net is the total amount of money an employee receives after deduction.

Distinguish Between Hourly and Salaried Pay

Hourly and salaried pay are different. Hourly rate is often calculated based on the hours an employee has worked. On the other hand, salaried pay is the agreed amount an employee is supposed to receive at the end of the month, notwithstanding the hours they have worked.

Taxes and Deductions

Employers should deduct the taxes required by law. Please note that payroll tax deductions vary by country. Therefore, employers must monitor how different federal taxes are applied to their businesses and the amount to be deducted from employee gross wage.

For voluntary deductions, the employer should verify with each employee for their consent.

Overtime and Benefits

Employees who have worked overtime are eligible for overtime payment. This pay is usually paid separately from employees’ basic salary. Employers should also consider employee benefits and who is eligible.

When doing payroll calculations, it is essential to consider withholding calculation methods, which include percentage and wage bracket methods. The percentage method entails withholding taxes on the basis of predetermined percentage rates by relevant authorities. On the other hand, the wage bracket method finds its basis on an employee's income level.

To simplify the calculating process, a payroll calculator can come in handy. Additionally, an automated payroll calculator ensures employers observe compliance with tax laws and regulations, and remit correct salaries.

How to Process Payroll

Once all the calculations are accurate, the next step is to process it. Employers must execute the payroll to ensure each employee receives payment promptly. This means finding the right processing tools to  either run manual payroll or make it automated

Prepare Employee Payslips

Payslips are documents that outline an employee's pay for a certain period. They detail all deductions, benefits, and net income to help employees see if their salaries are accurate. A payroll software however automates payslips to ensure correct information.

Processing Tools

A processing tool is a platform that connects to banks and other payment systems, allowing employees to access their salaries. These platforms are typically simplified with software, allowing employers to pay salaries on time.

There are many processing platforms tools that employers can use to process pay roll. Workpay is an automated system that automates various tasks, from calculation, tax withholding, and reduction to generating paychecks and direct deposits. Workpay simplifies payroll processes, allowing timely payments and compliance.  

The last step is to set a schedule and make timely payments. Employers can put them on repeat every month. Still, they should ensure that employee information is adjusted in case of any changes, such as promotion or use of a different bank account.

Finally, employers should stay up to date with the ever-changing laws and regulations related to payroll.

Payroll Management and Log-in

Employers and employees can access payroll systems using secure log-in portals that the company's payroll service provider will provide. To protect sensitive information, the provider should prioritize safe log-in procedures like passwords, user names, and multi-factor authentication.

It’s Time to Get Your Payroll Ready

Payroll preparation might seem overwhelming for employers, but it is not. With the right tools, knowledge, and guidance, it is easy. Understanding all the above guidelines can help big and small business owners have a seamless and efficient pay runs.

If you are outsourcing payroll services, Workpay can help a great deal. Ours is an automated system that allows businesses to complete paym runs faster. We are also affordable and ensure businesses get value for money. Visit us today and explore our HR and payroll solutions.

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