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How Does Payroll Work? This Is What You Need To Know.

Did you recently put up a small business? Are you in the middle of ironing out your systems? Then one of the most crucial areas you need to work on is your company’s payroll.

In simple terms, the payroll is the list of your employees and the corresponding amount of money that you pay them. Hence, a payroll system is the collective steps that involve the preparation, computation, and transmission of the payments to the employees.

And though payroll systems continue to evolve, the fundamentals remain the same.

But how does payroll work exactly? What are the key aspects you need to understand? What are the steps to ensure your company’s smooth payroll processing?

Continue reading below for the answers.

How Does Payroll Work? It Starts with the Paperwork.

How does payroll work? Like with some office systems, organizing payroll starts with paperwork. Since you are a new business, you need to secure an employer’s EIN number.

You can get this from the IRS.

Furthermore, you want to get your state and local tax IDs. Also, you need to secure the tax and financial information of your employees. This includes the W-4s and the W-49s.

But these depend if your employees are contractors or salaried, among others.

This is also the stage where you need to establish your business’ policies that affect employee salary. These are policies concerning leaves, attendance, and benefits. You need to craft these policies clearly.

Thereafter, you need to have everyone in the management sign-off on these policies.

Setting-Up Your Payroll Schedule.

Next, you need to establish your payroll schedule. This will determine how often you will pay your staff. There are many options to go about the payroll schedule.

However, the most popular format is to give out the salaries every 15th and last day of every month. If you feel like moving in a different direction, you may go for a weekly payout. You may also give out salaries once every two weeks or a one-time, big-time payout every end of the month.

The key to establishing a payroll schedule is to understand the financial situation of your employees. Keep in mind that they have to settle bills. These bills do not come in all at the same time.

This means opting for a one-time salary every end of the month may not work for most of them. Thus, sticking to payouts every 15th and 30th of the month may be the friendliest schedule to go for.

However, you also need to consider your company’s cash flow situation. Does your business charge clients every end of the month? Also, you need to review the current state laws.

Even if you wish to pay your employees once a month, the laws in your area may bar you from doing so. There are some states that institute laws as to how companies should pay their employees.

Since this involves laws, it is best to consult with the state payday requirements in your area before finalizing your schedule.

Payroll Calculation.

After deciding on your payroll schedule, you can then move to the payroll calculation. What you want to calculate mainly is the gross pay. Since not all employees have the same tasks, their gross pay will also differ from one another.

For salaried employees, the computation is quite simple. The paycheck will be the same every payday. The amount will only change if the employee gets a promotion or demotion.

Meanwhile, computation for salaries of hourly workers can be tricky. You will have to make deductions if the employees complete fewer hours than they should, you will have to deduct the equivalent pay from their gross pay.

On the flip side, you will need to add to their pay in case they worked overtime.

Enter the Deductions.

After computing the gross pay, that’s the time you can apply the deductions. What you want to deduct are taxes, health care, and Social Security. Do the same with your employees’ 401(k) contributions, as well as other payments like retirement accounts.

Keep in mind that Social Security and taxes are mandatory. This means deductions for these will apply to all your employees.

Payroll Transmission.

After taking out all the deductions, the final amount you will have is the net pay. This is the amount your employees will take home. This is also the one that you need to transmit smoothly.

Transmission depends on what your management agrees upon. However, the most common method of transmitting salary is through direct deposit. You can transfer the salary through a payroll account that you will open in the bank.

Another option is to pay your employees using checks. However, your staff will have to wait a few banking days for the checks to clear. This may become a hassle especially if they have urgent bills to settle.

Keeping Your Records.

Learning how payroll works doesn’t end with giving out salaries. As a business owner, you want to keep the payroll records of your company. Doing so will keep you from a myriad of complications in the future.

For example, if an employee wrongfully files a complaint concerning salary, you can show the complete salary records to the Department of Labor and resolve the matter.

Also, keeping salary records will help you in filing your quarterly and annual taxes.

Do You Need Software?

Last but not least, you should consider investing in payroll software. As a business owner, you may wonder how is payroll done in the most efficient way possible?

With the help of payroll software, you can execute certain tasks that will save you a lot of time and resources.

A good example is the paystub maker. With a few clicks on your computer, you can generate pay stubs containing all the key details regarding your employees’ payouts.

Keep in mind that there are payroll management problems you may encounter. Using software can help reduce them.

Cover Other Bases.

Answering the question “how does payroll work” is non-negotiable for any business owner. With a solid payroll system in place, you can pay your employees on time and manage your cash flow more effectively. But payroll is only one of the many important areas you need to cover in your business.

Hence, we encourage you to read our different articles on business management. We discuss important topics that will help you grow your business faster.

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Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.

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