Payroll is the method used to compensate employees appropriately and on time. This might sound easy, but things can get complicated, as there are many regulatory requirements that you must comply with. Payroll laws apply on federal, state, and, sometimes, local levels. Therefore, your payroll duties don’t end with paycheck and pay stub distribution.
Before you actually begin processing payroll, you might need to do some preliminary tasks. This may include reviewing and calculating employees’ time cards; entering new hires into the system; calculating bonuses, commissions, tuition reimbursements and retroactive pay for pay increases; modifying existing employees’ payroll records; computing adjustments from prior pay periods; entering wage garnishments and direct deposit data into the system; and calculating benefit days, such as vacation, sick, personal or leave time.
After you transport employees’ time into the payroll system, the wage-payment process begins. Perform manual adjustments to employees’ wages at this time, such as deductions for overpayment from a previous pay period, or addition to wages for bonus or retroactive pay. Double-check the pay period to ensure employees are paid for the correct time frame. For example, the payroll is biweekly. Verify the pay period start and end dates for the two-week period. Also, ensure that employees are paid according to federal and state minimum wage and overtime requirements.
Mandatory deductions are crucial because they’re legally required. The federal government requires that you withhold federal income tax, Medicare tax and Social Security tax from employees’ wages. Most state, and a few local, governments require that employers withhold state and local income taxes. Some states require additional withholding, such as state disability insurance and state unemployment tax. Wage garnishments are also mandatory deductions.
Payroll processing also includes making voluntary deductions from employees’ paychecks. These deductions are offered at your discretion. They may include pretax or after-tax health, life and disability insurance; paycheck advance; health savings accounts; and retirement plan contributions.
You must maintain a payroll record-keeping system that complies with federal and state requirements. Federal law requires that you maintain payroll records for a minimum of three years, along with records that determine wage computations for at least two years. Required documentation for employees who are entitled to overtime pay under the Fair Labor Standards Act includes daily and weekly work hours, regular hourly rate, daily or weekly regular pay, weekly overtime wages, additions to or deductions from earnings, total earnings for the pay period, and pay period start and end dates.
You’re supposed to pay all employee deductions to the appropriate government agencies or companies. You must also pay your own share of federal taxes such as federal unemployment tax, Medicare tax and Social Security tax, plus applicable state taxes. You also report taxes and wages to the proper agencies. This includes quarterly or annual tax reporting with the IRS and wage reporting with the state labor department.
Other aspects of payroll include running reports to verify payroll data for the upcoming payroll, balancing and reconciling payroll data, distributing paychecks and wage statements, creating automatic clearing house files for direct deposit purposes, and issuing manual or emergency checks to employees who were improperly paid.