HR’s Guide to Payroll
A quick guide of everything HR professionals need to know about payroll.
HR professionals know payroll is complicated. If everything goes perfectly, no one notices – but if you make just one error, you could lose your job or even get sued.
Why is payroll so complicated in the first place? Have you ever wondered why can’t you can’t just cut employees a check every two weeks? Modern payroll as we know it today dates back to the 1940s, and the answer has to do with tax withholding. Here’s what you need to know!
A Quick History of Employer Withholding
Employers can’t simply write checks to employees because of employer income tax withholding.
What is employer withholding?
Employers must withhold, deposit and report employment taxes. These include federal income tax, Social Security and Medicare taxes.
Income tax in the U.S. was created in 1861 during the Civil War to finance the war effort. Income tax wasn’t renewed after the war, but there was renewed support for income tax during the early 20th century.
The Sixteenth Amendment of 1913 granted Congress the power to collect income tax, and in 1914, the first income tax form, Form 1040, was created. That form is still used today.
How did employers become responsible for withholding taxes?
Few people owed income tax until 1940, but to finance World War II, tax obligations increased. To more efficiently collect taxes, the Treasury Department implemented employer withholding in 1943.
Pay schedules refer to both pay periods and pay dates. The pay period refers to the timeframe employees worked, and the pay date is when they receive their wages from that timeframe.
Employers have options when it comes to how often to pay employees. Payroll schedule options include monthly, semi-monthly, biweekly, and weekly.
What’s the difference between semi-monthly and biweekly? Semi-monthly is twice per month, and biweekly is every other week. Biweekly pay schedules have two additional pay periods than semi-monthly pay schedules.
State laws determine the minimum pay period – in other words, the minimum frequency you can pay. Click here to see a list of state regulations.
Picking a Pay Schedule
When considering pay schedule, employers should keep in mind:
These costs are generally charged each time payroll is run, so a weekly pay schedule will cost more than a monthly pay schedule.
Accounting Implications (Overtime):
Overtime has to be calculated on a weekly basis, even if you pay monthly or semi-monthly.
Because insurance benefits premiums are generally charged on a monthly basis, benefit payroll deductions are easier in a monthly or semi-monthly schedule.
Changing a Pay Schedule
If you determine your organization needs to adjust your pay schedule, you should:
- Analyze current pay schedule, see if any pay periods line up and choose the best point in time to adopt the new schedule.
- A best practice is to do so near the end of the fiscal year or end of quarter.
- Communicate the change to employees – especially if you intend to decrease the frequency of pay as it will impact their budgets.
What Options Do You Have for Payroll?
Do Payroll Yourself:
Doing payroll yourself is the lowest-cost option, but it’s time-consuming and error prone. You’ll need a spreadsheet and will need to calculate taxes yourself.
Payroll services are more costly, but it’s generally more reliable and there are fewer errors.
Hire an Accountant to Manage Payroll:
This is the most expensive, but most reliable, option.
What Do Payroll Providers Do?
1. Payroll processing:
Payroll provides automatically calculate how much employees should be paid.
2. Filing and Paying Payroll Taxes:
3. New Hire Reporting to the Government:
This is key to remaining in compliance.
4. HR and Benefits Administration Integrations:
5. Payroll Reporting:
Mastering payroll means comprehending a laundry list of terms. Here are the most commonly used payroll terms and definitions you need to know!
Download a PDF version of our Payroll Glossary:
A retirement plan sponsored by employers allowing employees to save and invest a portion of their paycheck pre-tax.
Adjusted Gross Income:
An employee’s gross income minus specific deductions.
These are marked on an employee’s W-4 and reduces their taxable income. They are based on statuses or circumstances, like marriage or children.
The total amount an employee will be paid in wages during a calendar year.
A fee paid to an employee for performing a service or selling a product.
Process of fulfilling official requirements. Payroll managers should perform extensive research to educate themselves on all relevant laws or outsource the responsibility to an accountant, payroll provider, or professional organization.
An individual that a taxpayer claims an exemption, for example, children.
Earned Income Credit (EIC):
A tax credit for certain people who’ve earned income under $53,267.
Employer Identification Number (EIN):
Also known as the Federal Identification Number, the EIN is a unique 9-digit number issued to your business by the IRS for tax purposes. You can apply for yours here.
Fair Labor Standards Act (FLSA):
A federal law that sets the rules for minimum wage, overtime pay, record-keeping, and child labor. The law applies to both private and public businesses so it is important to familiarize yourself with the standards and understand how to properly classify and pay employees.
Federal Insurance Contributions Act (FICA):
A payroll tax imposed on employers and employees that fund Social Security and Medicare.
Federal Withholding Rates:
A federal income tax rate based on a person’s taxable income and filing/marital status.
Employer’s Quarterly Federal Tax Return. This form tells the IRS how much income tax, Social Security tax, and Medicare tax you have withheld from your employees’ paychecks during the past quarter. Download a blank 941 form here.
A year-end summary of all non-employee compensation that includes money you paid to independent contractors, freelancers, vendors, landlords– anyone not on staff. Download a blank 1099 form here.
A report of how much compensation paid to employees for the previous year and how much taxes were withheld. These forms are divided into state and federal sections since employees file taxes with each. Download a blank W-2 form here.
A form that employees fill out to let their employer know how much money to withhold from their paycheck for taxes. The form should be filled out on the employee’s first day and it includes information such as marital status, number of dependents, exemptions claimed, and more. Download a blank W-4 form here.
A form that employers use to gather basic identity and tax information from independent contractors. Although employers don’t withhold taxes for independent contractors, they are required to tell the IRS how much they paid them over the course of one year if the amount exceeds $600. Employers use the information in the W-9 to report the income to the IRS. Download a blank W-9 form here.
A form of compensation provided by the employer other than income, such as company cars, health insurance, or employee discounts. Such benefits are subject to federal and state taxes and must be reported to the IRS on an employee’s W-2.
Federal Unemployment Tax Act (FUTA):
A piece of legislation that authorized the federal government to collect taxes from employers for the purpose of funding state unemployment agencies and compensating former employees who are eligible for unemployment insurance.
Deductions that must be withheld from an employee’s wages to satisfy the person’s debts or legal obligations. Common garnishments include child support, unpaid taxes or defaulted student loans.
The total amount of a person’s salary before taxes or other deductions are subtracted.
Taxes all individuals or entities must pay that varies with their taxable income.
An outside worker hired for a specific and limited scope of work. They should determine the manner in which they complete their tasks. Be aware: misclassification is a common pitfall of the payroll process.
Part of the FICA, the Medicare Tax funds Medicare hospital insurance for certain Americans.
The minimum hourly wage per state an employer can pay for work.
The amount employee’s make after all deductions are taken from their check.
Non-exempt employees who work over 40 hours in a week must be given this pay, which is equal to at least time and a half of their regular rate.
The number of days for which an employee is paid, for example, weekly, bi-weekly, semi-monthly, or monthly.
Part of FICA, Social Security helps fund benefits for retirees.
The amount of pay a worker takes home from each paycheck after all deductions and withholdings have been taken out.
A government requirement for all taxpayers that come from an employee’s pay.
A fixed regular payment made by an employer to an employee for a job or task.