What Is Payroll and How Is It Calculated?

JetPay Communications

March 28, 2019

For the unfamiliar, payroll can be deceptively simple. Burgeoning entrepreneurs or executives may assume that all that’s involved is tallying employee timesheets and issuing payments. In reality, payroll processing is much more complex, and payroll departments are responsible for a lot more than making sure workers get paid.

To shed some light on the subject, here’s a primer on the components various aspects of payroll processing and how it can be greatly simplified with the right software platform.

The Definition of Payroll

To begin, it should be understood the term “payroll” has a few different common definitions. For instance, payroll is often used to refer to a company’s total salaried and hourly workers, and the expenses associated with paying them. And though companies may consider independent contractor wages to part of their labor costs, legally, only employees are “on the payroll.”

Payroll is also regularly used as shorthand for a company’s payroll department (e.g., “all timesheets need to be turned into payroll by Friday”). The phrase “closing out payroll” is used to describe the process of completing payroll settlement process before funds are distributed.

Payroll Classifications

One of the most important components of payroll processing is proper worker classification.

The most common types of worker classifications are exempt, nonexempt and independent contractor. Exempt workers are full-time salaried employees who are exempt from overtime, minimum wage and other regulations enumerated in The Fair Labor Standards Act (FLSA). Nonexempt workers can be full or part-time hourly employees who are protected by the FLSA, and independent contractors are freelancers who are paid under specific pre-agreed-upon terms.

The Department of Labor has established strict standards for each class that involves factors like industry, job title and pay rate. Moreover, the Internal Revenue Service has different tax regulations for employees and contractors. As improper employee classification or tax withholding can be very costly for a firm, it’s a good idea for operations of any size to utilize payroll software that automatically handles these concerns.

Payroll Calculations

To reiterate, calculating payroll involves more than just reconciling timecards and cutting checks, but that is a good place to start. Traditionally, an organization’s payroll department is responsible for ensuring that workers are paid in accordance with their contract terms and federal, state and regional regulations before distribution are made. That means accounting for things like:

Wages: All employees need to be paid out in accordance with hours worked within a specified period and the term of their contracts. That also means making payroll adjustments for overtime, holiday, sick, bereavement, vacation and severance pay, as well as commission, tip and reimbursement payouts.

Time Card Errors: Generally, a firm’s payroll department is responsible for fixing punch errors. For example, if an employee forgets to clock in or clock out for a rest break or at the end of a shift, those errors will need to be corrected before the end of a pay period.

Deductions: Before pay distribution occurs, employees’ wages must be deducted for federal, state and local taxes as well as applicable health benefits, garnishments, retirement plans and life and workers’ compensation insurance.

Because an organization can be saddled with significant civil and criminal penalties for incorrect or incomplete processing, accurate payroll calculation is hugely important. As such, all firms can benefit from using payroll calculator software because it can greatly reduce such errors.

JetPay’s software can be very helpful with this area of human capital management (HCM) processing, as it features tools that make payroll calculation a breeze.

Payroll Reporting, Record-Keeping and Tax Filings

When an organization wants to take on new personnel, it must notify specific federal government agencies so the hiring candidate’s legal ability to work in the United States can be certified. Once that happens, the government will need to be sent paperwork — such as W-4 forms for employees and 1099s for independent contractors — to ensure that their wages are being taxed appropriately. This set of responsibilities is known as payroll reporting.

Similarly, payroll record-keeping refers to the mandate requiring employers to retain records of all employment contracts, timecards, tax documents and payroll distribution and independent contractor payments.

Additionally, corporations are legally responsible for withholding appropriate federal, state and local taxes from their employees’ wages and documenting the deductions. Companies are then required to forward the resultant tax revenue and paperwork to the appropriate government agencies.

As a fully integrated HCM platform, JetPay’s payroll software allows employers to manage their reporting, record-keeping and tax filings from the same dashboard.

Payroll Distribution

Lastly, payroll departments are also responsible for distributing company funds to employees and freelancers. Like every other part of the payroll process, distribution can be optimized with the use of HCM software. Once payroll settlement has been completed, JetPay allows employers to pay their workers via direct deposit, paper check or payroll debit cards.

Contact JetPay today to streamline your organization’s payroll processing.

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