Payroll 101: overview

Tags: General, Payroll, Tax

Payroll Overview

Payroll as a process

Payroll is the process by which employers calculate and distribute wages and salaries to their employees. This process involves determining the gross earnings of each employee, withholding taxes and other deductions, and issuing payments through checks, direct deposit, or other methods.

Payroll as a system

Payroll can also be described as the system used by a company to manage and organize employee payment information. This system includes tracking hours worked, managing employee benefits, applying tax withholdings, and ensuring compliance with relevant laws and regulations.

Payroll administrators

Payroll administrators keep companies compliant throughout the year, ensuring timely and accurate compensation goes out while they safeguard withholdings used for taxes and benefits.

A payroll admin might own some of the following tasks:

• Verifying new hires
• Terminating employees
• Verifying benefit deductions
• Verifying salary/rate changes
• Processing payroll and/or special payouts
• Distributing W-2s
• Sending timesheet reminders to employees
• Reviewing timesheets/working with HR to solve time issues
• Record keeping

Payroll requirements

Prior to Running Payroll

Prior to Running Payroll, you’ll need:

1. EIN: The number the federal government uses to identify an organization for tax purposes.

2. State and local ID numbers: Like an EIN, but at the state and local level.

   • i.e. State Tax Identification Number, State Unemployment Insurance (SUI) Tax Number, etc…

3. Employee tax information: W-4 forms for full- and part-time employees, W-9s for contract employees.

4. Payroll budget and schedule: How much you will pay employees, and how often.

   • Pay schedule refers to the predetermined timetable on which employees are paid. It outlines the frequency and timing of pay periods, such as weekly, bi-weekly, semi-monthly, or monthly.

5. Tax payment schedule: When you will pay taxes for the organization.

   • Typically, this is completed on a quarterly basis.

   💡 If using Trayd’s payroll feature, then Trayd will file your company’s quarterly taxes on the employer’s behalf. It’s important that the employer complete the federal and state tax setup on Trayd before the quarter ends to ensure a timely tax filing.

To Process payroll

To Process payroll, you’ll need to:

1. Calculate gross pay

   • For hourly employees, this means combining regular hours and overtime and multiplying by standard and overtime payment rates.

   💡 If using the Trayd scheduler feature, then calculating hours is automated so that you can spend less time reconciling shift hours.

2. Calculate net pay

   • After calculating federal, state, and local taxes according to employees’ individual withholding information, add insurance, retirement, and any other deductions, and subtract that amount from their gross pay.

   💡 If your workers are using the Trayd worker app, then they can directly add and manage their own tax information. The Trayd mobile app is meant to empower workers to take control of their individual tax setup.

3. Reserve/distribute deductions

   • Taxes and other deductions must be paid immediately, or according to each company’s schedule policy.

4. Issue payment

   • Print checks or issue direct deposits to your employees.

Payroll process

1. Set up Business Accounts

   • Register your business entity in order to hold funds for paying taxes and fees for the operation of your business
   • After registering, you should have the following id numbers and accounts:
     • An Employer Identification Number (EIN) from the IRS
     • An Electronic Federal Tax Payment System account (EFTPS) to pay federal taxes online or over the phone
     • State and local government employer ID numbers (where required)
     • State unemployment insurance account (SUTA), as detailed on your state’s Labor Office website
     • A state new-hire reporting account
     • A state worker’s compensation insurance account

2. Choose Your Processing and Payment Methods

   • Manual: spreadsheets or paper bookkeeping
   • Outsourced: accountant or payroll service
   • Automated: payroll software

3. Employee Information Setup

   • Collect and set up employee details (i.e. legal name, address, employment status, SSN/EIN, W-4 tax withholding information, rate of pay, garnishments, bank account info, etc…)

4. Choose a Pay Schedule and Pay Method

   • Pay Schedules: Weekly, Biweekly, Semi-monthly, or Monthly
   • Pay Methods: direct deposit, cash, or checks

5. Withhold and Submit Employee Taxes

   • Businesses and employees both owe taxes to the federal and state government
   • Since individual factors determine what each employee owes, calculating withholdings can be time-consuming and error-prone.

   👉 One of the primary reasons many companies depend on a payroll service provider such as Trayd is to alleviate the time, effort, and stress associated with correctly filing taxes.

   • The 3 types of payroll taxes withheld are:
     • State & Local Taxes: these vary from state to state and locality
     • Federal Income Tax: this is collected by the IRS based on the amount an employee earns and the number of additional allowances they claim on Form W-4
     • Federal Insurance Contributions Act (FICA) Tax: often recognized as Social Security and Medicare taxes. The tax rates for FICA taxes can change every year

6. Deduct Premiums and Payments

   • Employers who provide benefits to their full-time employees are responsible for covering the cost of those benefits and managing contributions to related funds. This involves regularly deducting premiums and contributions from paychecks, either monthly or biweekly, as payments become due.
   • Typical deductions and payments: health insurance, HSA/FSA, insurance, retirement funds, etc…

7. Employer Taxes

   • Federal Unemployment Tax Act (FUTA): law requiring employers to pay unemployment tax
   • State Unemployment Tax Act (SUTA): every state determines its own SUTA tax

8. Running Payroll

   • Distributing funds to their appropriate accounts requires a number of steps, including:
     • Time Tracking: record hours worked and time off
     • Gross Pay Calculation: calculate total earnings before deductions
     • Deductions: apply taxes, benefits, and other deductions
     • Net Pay Calculation: determine take-home pay after deductions
     • Payroll Distribution: pay employees via their preferred payment method
     • Pay government agencies and benefit providers: employee ****withholdings and employer contributions need to be sent to the appropriate agencies and insurance carriers on time

9. Keeping Records: federal law requires employers to maintain accurate payroll records for three years, and accurate payroll tax records for four years.

   • 3 Year Records: payroll records (wages, time cards, time sheets, etc..), Family and Medical Leave Act (FMLA) records
   • 4 Year Records: employment tax records (paystubs, tax documents)
   • 5 Year Records: Occupational Safety and Health Act (OSHA) records of work-related injuries and illnesses

   👉 Some of these processes can be streamlined using Trayd, which automates many of the calculations, reporting, and compliance tasks. It’s important for a business's payroll admin to understand these steps in order to maximize their use of the Trayd payroll.