STPS

Payroll 101: What is Payroll and How Does it Work?

What is payroll?

Payroll is more than just an employer paying their employees on payday. More goes into it than you think. When people think of payroll, especially employees, they think payday is one and the same. While that might be a simple way of putting it, there is more to it though. Employers know a lot more goes into it. And as a payroll company, we know every single step that goes into making payroll happen.

In short, payroll is a process of paying employees. Running payroll for a business consists of many steps to reach the actual amount of money that each of your employees with receive. These steps include; gathering employee information, and calculating employees’ net pay and gross pay by factoring out deductions from taxes, benefits, and garnishments. 

Payroll is probably one of the most difficult things for you to understand in your company but by going through this step-by-step process you will be able to do it yourself if you want.

Steps to run payroll:

There are a couple of things you need before you start processing payroll. You need an EIN number which is the number for the federal to identify a company for tax purposes. You’ll also need the state and local ID number which is just like an EIN number but for state taxes. A payroll budget and schedule and a tax payment schedule for your company are also needed.

Collect data:

All full-time or part-time employees must fill out a W-4 form when they are employed. Contractors must fill out W-9 forms. These forms give you all of the information and data you need to collect to start the process to run payroll.

Calculate gross pay:

To calculate gross pay for a salaried employee, take the annual salary and divide it by how many pay periods they have in a year and the answer to that calculation should be their earnings for each pay period before the deductions are taken out.

To calculate gross pay for an employee that works hourly, multiply their hourly rate by the number of hours they worked in that pay period. That amount should be the wage that they should receive for that pay period before the deductions are taken out.

To calculate an employee that is paid per mile, calculate the price per mile multiplied by the number of miles they drove in that pay period. That amount should be the wage that they receive for that pay period before the deductions are taken out.

Calculate net pay:

To calculate net pay, deduct all of the voluntary and mandatory deductions such as taxes, insurance, retirement, or garnishments. After the deductions, that amount is what the take-home rate would be for the employee.

Issue payments:

Payday is here! Time to pay your employees the net pay that you calculated either by direct deposit, check, or pay card. Avoid including freelancers and contract workers when you run payroll because freelancers are responsible for all their taxes and benefits. Contract workers are paid by you by purchasing their services. If you include freelancers and contract workers in your payroll, it will make your records more complicated.

File tax reports:

Submit tax filing for federal, state medicare, and social security taxes. Also, report unemployment payments and retirement contributions. You’ll report all the payments using IRS Form 941. These payroll taxes are the most common deduction. These taxes are better known as FICA (Federal Insurance Contributions Act). 

The FICA tax rate is 7.65% which is the social security tax rate of 6.2% and the Medicare tax rate of 1.45%. Withhold these taxes from an employee’s gross pay. The deductions that need to be taken out depending on the employee’s W-4. The W-4 determines how much you should withhold for federal income taxes. To calculate the federal income taxes, use an IRS tax table.

Pay taxes:

Pay all tax authorities, benefit providers, and retirement firms you’re employees’ taxes, benefit funds, and retirement payments. You’ll report all the payments using IRS Form 941.

Bottom Line:

The payroll process really takes time and skill to get everything right for your employees. After you go through all of these steps to process payroll, you can now realize that you could get someone else to do your payroll for you. There are a lot of payroll services options that could fit your business so you don’t have to do the math for every single one of your employees. 

Here at Superior Trucking Payroll Service, we want to make things easy for you. We want to take all the weight off of your shoulders, and processing your payroll is what we do best. It’s one less thing for you to worry about and more time for you to focus on the other aspects of your company. There are a lot of steps to processing payroll and it can be quite difficult to do yourself so if you need a hand, contact us and set up your payroll service today.

Written by Taylor Robinson

Taylor is an accounting student at Montcalm Community College, who dreams of traveling to Italy. She enjoys reading, watching the Tigers with her dad, and going thrifting.

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