The human resource department uses a number of documents to ensure that they properly document transactions related to the needs of the business, the management, and the employees. One of these documents is the payroll. A general payroll is used to identify the proper pay that must be given to the employees for a particular time period. This includes the computation of taxes, overtime pays, benefits, and the like.
A proper payroll system should be present in every organization or business to ensure that it is done accurately and efficiently. If you want to create the payroll of your business, make sure that you are guided by payroll samples and templates that can help you effectively list down the content necessary to be seen in a basic payroll account. In this article, we have listed some important information regarding a payroll. Read more about the definition of a payroll, its importance, the essential components needed to be present in one, and other information that will be useful in helping you create one for your business.
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What Is Payroll?
A payroll is a tool used by many businesses and companies that contains the total amount of compensation that the business needs to pay its employees for a particular period of time. In business, the term payroll can have different meanings depending on how it is used. To help you further understand the definition of a payroll, we have listed below the definition of a payroll.
A payroll can be defined as follows:
- Payroll is the process of creating and distributing employees’ paychecks or payslips. This can be done either physically, through a printed document or sent through an employee’s email.
- A payroll can also be defined as a tool used to record an employee’s earnings or salary for a particular period of time, including his/her deductions, taxes, and so on. A payroll also contains a detailed list of the employee’s payroll deduction with regards to the time not worked, specifically any vacations, sick leaves, and holidays that the employee has had for that particular cutoff.
- A payroll is also a document that contains the total earnings that each employee has accumulated for a whole year.
Importance of Creating a Payroll
There are many reasons why completing a payroll is important. A payroll is one of the many significant tasks in a business, be it small or big, that must never be overlooked. If you want to know more about the importance of a payroll in a business, below is a list of the reasons why a payroll is essential.
The Morale of a Business’s Employees
A company’s payroll is one of the most important things that can affect the morale of a business’s employees. Since employees work for the company, it is important for the business to provide their salaries and wages in a timely manner and should be done consistently. Giving a sense of assurance to your employees is important in order for them to feel secure that they will be paid on time, as well as understand that the company is financially stable. If a company fails to pay on time, this will cause employees to underperform, which can greatly affect the operations of the business.
The Compensation That Employees Get
In an organization, a payroll system calculates the amount of compensation that an employee will be getting. An accurate and well-crafted payroll is essential since it allows employees to feel their net worth within the company that they are working in. A payroll includes the total compensation that the employee will get such as his/her salary, benefits, bonuses, and incentives. Typically, employees are also given pay raises and rewards on an annual basis depending on his/her performance evaluation. Organizations and companies will also benefit from this since a well-made payroll can boost the performance of employees especially if they feel that they are valuable to the company and are rewarded for their efforts and hard work.
Reallocation of an Organization’s Resources
Creating a payroll for the business can be time-consuming, especially for small businesses who don’t have enough manpower and resources to focus on the creation of a payroll. Since a payroll needs to be done at least once or twice a month, it is important for the organization or business to create or purchase a reliable payroll system to ensure that all the information needed in a payroll are accurately included in the document. A company can also consider outsourcing their payroll or hiring an external entity to do the payroll. This will help the business in freeing up more time and focusing on other important areas of the business.
Lowering a Business’s Tax Bills
Finally, a payroll is important since it allows businesses, especially those that are running a small business, to lower their state taxes as well as federal taxes. This is why a payroll needs to be done as accurately as possible since the information contained in a payroll can be used to withhold a business’s employees’ personal taxes.
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Essential Components of a Payroll
There are 4 essential components that need to be present in a payroll. Understanding how these components fit will help you streamline the payroll process of your business. Below, we have listed down the essential components of a payroll.
The components are as follows:
When an employee is hired by the business, a basic compensation package is offered by the company. In a payroll, gross compensation refers to all the items included in the basic compensation package. This includes the employee’s base pay, whether it is a fixed salary, monthly, or hourly basis. It also includes the overtime and other multipliers, as well as the sick leaves and the vacation leaves that the employee has. To help you further understand the different types of gross pay or compensation, the 3 main types of gross pay are as follows:
When an employee is given a fixed salary, he/she gets a fixed amount, depending on the amount that was agreed upon by both the company and the business. Employees are paid a fixed amount despite their attendance.
When an employee receives a monthly salary, he/she is paid a standard amount, although this type of gross pay is not fixed. The amount that the employee will get depends on his/her attendance. For example, an employee’s absence or tardiness are deducted while an amount is also added for any overtime that the employee has worked.
When an employee is paid on an hourly basis, he/she gets paid depending on the total hours that he/she has worked for a particular period of time.
The recurring items in a payroll refer to the items that are either credited or debited by a business to its employees every time a payroll is created. This includes the allowances, loan payments, and other subsidized benefits such as dental and healthcare insurance, gym membership, etc. It is important when creating a payroll to clearly specify these recurring items in order to have a record of these deductions. These items are either deducted in every pay period or in perpetuity.
Ad hoc Items
When creating a payroll, there are ad hoc items such as the adjustments, expenses, and vacation or sick pay. These items are not deducted every time a payroll is created or on an ad hoc basis and can vary depending on the total amount of ad hoc items to be deducted. For example, if an adjustment is made to fix a specific error, this is called an ad hoc item wherein a payment is made for that particular instance. An expense is also an ad hoc item since it can vary from payroll to payroll.
Lastly, another important component in a payroll is the government deductions. These items refer to the taxes and other government deductions, depending on your location. It is the responsibility of employers and businesses to deduct these items from their employees. It should be done on time and should conform to the laws of the country where you are from.
The items mentioned above are the four essential components of a payroll. Ensuring that these items are present when you create a payroll is important in order to have an accurate document or tool for your business. Now that you understand these components, you will be able to effectively streamline your payroll processes.
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Things That Can Affect the Creation of a Payroll
Since creating a payroll involves the functions of a human resource personnel, there are instances where the document can be prone to errors. Some of the things that can affect the creation of the payroll are as follows:
- The experience of the human resource when it comes to the creation of a payroll. The person handling a business’s payroll must be experienced in this field to ensure that errors and mistakes are avoided or minimized. Since creating a payroll can be a complicated process, understanding all the elements needed in the payroll, the steps, and the information required is essential for any business or organization.
- The tax regulations being followed by the business. When running a business, there are certain tax regulations that the company follows. The taxes that will be deducted in a payroll must be based on the tax laws of your country especially since these tax laws constantly change depending on the level of government, from federal, state, and local levels.
- The number of employees that are included in the payroll for a specific duration of time. When you create a payroll, keeping it updated is necessary in order to prevent any errors. The number of employees in the business, including new hires, should be clearly specified and updated in the payroll being created.
- The format and layout of payroll accounts where the human resource personnel refers to. You need to make sure that you follow the right template to ensure that the format, as well as the layout of your payroll accounts, is based on your business’s previous payroll. If you need a template for the creation of a payroll, you can download the samples and templates that are available on this page.
- The benefits, deductions, and other items that are based on the performance of the employees within the period of the payroll. Ensure that the benefits that the employees will receive, the deductions that will be deducted in their payroll, and other necessary items are clearly outlined in the payroll that you will be creating.
- The computation of the amounts that are involved in the creation of the payroll. It is important for you to have an effective payroll system to calculate the amounts and deductions in the payroll. This will ensure that you will have an accurate document, free of any miscalculations and errors.
- Other legal and organizational responsibilities that are needed to be considered to ensure the completion and accuracy of payroll accounts. Since businesses have both legal as well as organizational responsibilities, it is important to consider these items to ensure that you will have a complete and accurate payroll. For example, one of the legal responsibilities that the business has is deducting and paying the right taxes that are required by the government.
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Important Pointers to Remember When Creating a Payroll
Setting up a business’s payroll can be a time-consuming and complicated process. This can be especially true when a business handles their payroll in-house instead of outsourcing it. Having an unorganized payroll system can be a nightmare for both the business and its employees. To ensure that you will have an effective payroll system, here are some useful payroll tips to help you manage your company’s payroll.
The tips are as follows:
- Always remember to classify your business’s employees. Since there are various types of individuals that can work for your company such as an independent contractor, interns, and regular employees, properly classifying them will make it easier for you when creating a payroll.
- Before you start creating a payroll, it is important for you to decide how often you will be paying your employees. You can either choose to pay them on a weekly, bimonthly, or monthly basis.
- Invest in a payroll software for your business. Should you opt to have your payroll in-house, it is important for you to choose the right software. Selecting one that stores your information through cloud or through the Internet is the best option since you will be able to access them easily.
- Always keep track of your business’s records as well as documents to be able to simplify the process. Keeping them in one place and ensuring that they are organized is key.
- Remember to create a budget for your payroll, specifically for the wages or salaries of employees and the taxes that you will be paying. This will make it easier for you to manage your finances when it comes to paying your employees, ensuring that they are paid on time. You will also be able to prevent being penalized if you fail to pay your business’s taxes on time.
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Tax Deductions in a Payroll
As mentioned above, a business collects and pays certain taxes. These payroll taxes are required by the government from businesses and organizations. Here are the different payroll taxes that are collected and paid by companies.
The types of payroll tax deductions are as follows:
- Federal tax, state tax, and local income taxes: These types of taxes depend on the employee’s salary or income and are deducted by the employer from the gross pay of the employee. The Internal Revenue Service provides a tax chart for tax that will help businesses determine the amount that will be deducted from the employee for a particular period of time.
- Social Security Taxes: This type of payroll tax is required for insurance purposes. Both the employer and the employees are required to pay a certain percentage, depending on the country, based on his/her gross pay.
- Medicare Tax: Just like the social security statement tax, both the employer and the employee are required to pay the Medicare tax. The purpose of the Medicare tax is for health insurance, dental, and so on. Similar to the social security tax, a certain amount is also paid or deducted from the total earnings or gross pay. For individuals that are self-employed or those who do freelance work, they are required to pay the full amount.
How to Set Up a Payroll System for Your Business
Before you set up and create a payroll system for your business, it is important for you to understand all the necessary steps needed to ensure that you will have an effective and certified payroll system. Here, we have listed down the steps to help you set up the payroll system for your organization or company.
The important steps are as follows:
- One of the important things that a business should have before setting up a payroll system is an employer tax identification or an EIN. It is required for both large corporations and small businesses to have an EIN since it is essential when reporting taxes and other documents to the internal revenue services or the agency that collects these taxes.
- Classify your business’s employees whether they are regular employees or independent contractors. Understanding and classifying the different employees that your business or company has will make it easier for you when filing taxes such as the income taxes, security taxes, and Medicare or insurance taxes.
- File all the necessary paperwork, especially when hiring new employees. Have them sign various documents, tax forms, and other documents that you will need when reporting and paying taxes.
- Next, decide whether your business’s employees will be paid on a monthly or bimonthly basis. For example, if employees are paid on a monthly basis, he/she will get paid once in a month, while employees get paid every fifteen days or twice a month on a bimonthly basis.
- Set up your business’s payroll system. You can choose to purchase a payroll software or you can choose to outsource your payroll through various companies that offer these services. Outsourcing your payroll will allow you to reallocate your resources, which will make it easier for you to focus on the important tasks and aspects of the business.
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