Payroll is a list of financial records of your employees’ wages and salaries, including their withholdings, deductions, bonuses, and paid time off, such as vacations and sick days.
Payroll processing is the preparation of your employees’ paychecks and payment of payroll taxes. This includes includes the distribution of paychecks, whether through printed checks or direct deposit. You can process payroll yourself, with the help of a bookkeeper, or through payroll software.
Gross Payroll Cost
Your gross payroll cost consists of three aspects of payroll processing:
Withholdings are the amounts taken from each employees’ paycheck, including federal and state income taxes. The amount you must take out for federal income taxes is determined by each employee’s W-4 form. State income taxes are determined through a state W-4 or similar form.
Withholdings also include payroll taxes and court-ordered withholdings.
You are required to pay payroll taxes to federal and state taxing authorities. The IRS strictly defines payroll taxes as FICA taxes, which are social security and Medicare contributions.
In some cases, the courts may require you to garnish your employees’ wages to pay child support or repay debts, such as owing back taxes.
An employee’s gross pay is the total amount paid to an employee each pay period.
For salaried employees, their gross pay for each pay period can be determined by dividing their gross annual pay by the number of pay periods in the year.
For hourly employees, gross pay is their hourly rate multiplied by the number of hours worked during the pay period, including any overtime.
Net pay is the amount an employee receives after withholdings and deductions. The net pay is the amount on your employee’s paycheck.
The Fair Labor Standards Act (FLSA) doesn’t require that you provide paystubs, but does require you to keep an accurate record of hours worked by and wages paid to each employee. Your state, however, may require you to provide paystubs and may have laws detailing what information must be included on your paystubs. This information often includes the employee’s name and social security number, pay rate, pay period, gross and net pay (for the pay period and for the year-to-date), and withholdings and deductions.
A pay period is the length of time over which an employee’s hours worked are recorded to be paid. Common pay periods are monthly, weekly, biweekly (occurring every two weeks), and semi-monthly (occurring twice a month). Biweekly results in 26, sometimes 27, pay periods. Semi-monthly results in 24 pay periods.
A workweek is 168 consecutive hours – or a seven-day period. You can set your company’s workweek as Sunday through Saturday, Monday through Sunday, etc.
Overtime is paid to employees who work over 40 hours in one workweek, and the pay can never be less than one and a half times an employee’s hourly rate. The overtime premium is the “half” portion of overtime pay.
If an employee works overtime, there are two ways you can calculate their gross pay for the workweek, if you’re not using a payroll software that will calculate overtime for you.
You can multiply your employee’s regular pay rate by 40 hours, then multiply their time and a half rate by their additional hours worked and add the two together. For example, if your employee’s standard pay rate is $10 per hour, and they worked 42 hours one week, they’d make $15 an hour for the two hours they worked overtime ($10 * 1.5 = $15). Their gross pay for the week would be:
You can also calculate your employee’s overtime pay by multiplying the total hours worked by the employee’s standard pay rate, then multiplying the employee’s overtime premium by the additional hours worked and adding the two together. Using the same example, your employee’s overtime premium would be $5 ($10 * 0.5 = $5).
You aren’t required to pay exempt employees for overtime. Exemption is based on how much they’re paid, how they’re paid, and what kind of work they perform. To be exempt, an employee must be paid at least $23,660 per year ($455 per week) and on a salary basis. The employee must also perform exempt job duties, which include executive, professional, and administrative tasks.