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Payroll Management

How is Payroll Calculated?

The understanding of calculating Payroll is essential. It ensures that your business gives importance to its workers and compensates them for their work. It ensures that the employees are satisfied within the organisation. It builds confidence in your staff that their hard work will be compensated with reliability.

Overview

Starting a new venture or being an entrepreneur is full of challenges. There are so many things and components that need the attention of the owner. Some of the owners are great at identifying and managing talented staff, calculating payroll, managing time, marketing their services to customers, and growing a customer base. 

These are the works needed to be performed from a broader perspective. But there are certain fundamental operations of every business, and the bigger targets and skills wouldn’t work if these operations are not performed efficiently. One of these operations is payroll calculation.

The understanding of calculating Payroll is essential. It ensures that your business gives importance to its workers and compensates them for their work. It ensures that the employees are satisfied within the organisation. 

It also ensures that the organisation follows tax and employment policies. It builds confidence in your staff that their hard work will be compensated with reliability. But, Payroll is an operation that does not get much attention from the owners. So, there is a complete process in calculating Payroll, which can help your business.

Types of Payroll

There are different types of employees in an organisation, and for that, different techniques are used for payroll calculation:

  • Payroll for hourly workers: Some workers work in an organisation on an hourly basis. To pay those employees, one would need some documents like a timesheet or timecard. Timecard or Timesheet is a statement which records the information regarding the hours the employee has worked for. To calculate the Payroll hourly, the organisation needs to assign the rate of employees’ classes. 
  • Calculation of the Payroll for Salaried Workers: The salaries of workers are paid on a fixed basis. It means they are paid a fixed amount every month. They are also paid for overtime. The state laws or the organisation decides the compensation for overtime. 

Formula for calculating payroll

Calculating payroll is an essential task for any business that has employees. Payroll is the total amount of money that an employer pays to their employees for the work they have done. The formula for calculating payroll depends on whether the employee is salaried or hourly.

Salaried Employees

For salaried employees, the gross pay is the amount you offer them when hiring, plus any additional earnings like bonuses or commissions. The standard gross pay calculation is:

Gross Pay = Annual Salary Amount / Number of Pay Periods 

Hourly Employees

For hourly employees, gross pay equals the hourly rate times the number of hours worked. If there is overtime, multiply the number of overtime hours worked by the overtime pay rate and add it to the gross pay. The formula for calculating gross pay for hourly wages in one pay period is:

Gross Pay = (Number of Hours Worked x Hourly Wage) + (Overtime Hours x Overtime Pay Rate)

To calculate the net pay of an employee, you must first calculate gross pay, then subtract any deductions from gross pay to get the net wages of the employee (gross pay – deductions = net pay).

Opt for a Notable Payroll System

As mentioned above, there are three methods of payroll system: 

The organisation can choose any of the above methods depending on factors such as the size of the business, business growth, state’s policy regarding payroll taxes and laws. Organisations with a more complicated structure tend to opt for payroll software or outsourcing for perfectly calculating payroll.

Create and Finalise a Payroll Policy

Before creating a payroll policy, you need to consider your local labour laws, federal labour laws, and state overtime laws. One of the most common violations is overtime that is unpaid. It happens very often because of the lack of knowledge.

The following are some things which should be included in your payroll policy:

  • The pay dates, along with every pay period’s length and the date on which the payment is made
  • The mode of payment, i.e., direct deposit or cheque.

Collect Employee Information

You need to gather employees’ personal information. If you are paying your employees through direct deposit, you must get the employee’s consent and collect their bank details.

Set Up Direct Deposit

If the mode of payment of an organisation to their employees is direct deposit, then as the owner of the business, you can easily establish direct deposit via your business’s bank or through your payroll service provider. You have to gather certain information from your employees and then transfer it to the bank or the payroll service provider, and the account is created.

Establish a Time-Tracking System

Employers need to maintain a record of all the noteworthy work hours for nonexempt employees as well. Mostly, “nonexempt” employees include hourly employees. There are two ways through which you can track work hours. One of them is to ask the employees to manually enter the time when they enter and exit the working premises. The other one is to use a time tracking software which has the ability to hold the employee timesheet records.

Collection of the Significant Employee Timesheets

This is the end of the month, which means it is the time of the notable pay period, and you need to run your first Payroll. So, to run your first Payroll, you need to collect an employee time card. The time cards can be either made of paper, or they can be digital. If they are made of paper, you must spend some hours rectifying any errors in your payroll records. If the timecards are digital, now would be the time to import them to the payroll software. 

Calculate Net Pay

Once you have the information regarding attendance ready, you can calculate the final net pay of your employees. The net pay is a result of the subtraction of the withholding and tax deductions from the actual salary of the employees. 

You need to work carefully with your finance team to understand the tax policies and deductions that apply to other employees. You should always provide the benefits and ensure salary revisions apply to each employee.

When all the information regarding the payroll is sorted, you can calculate the employee’s net pay. Make sure the net pay complies with the payroll policy and other payroll laws governing your region. If you have purchased payroll software, then you just have to input the collected data, and the system will calculate employees salaries.

Approve and Then Finally Submit the Significant Employee Payroll

Approval has always been the most significant step in the case of the Payroll for hourly working employees. In this step, you will provide them with the information that their Payroll is accurate. Once the employee time cards receive approval, you can easily issue the payments to all your company’s employees. 

Reporting and Updating of the Payroll Records

The payroll records are updated once the checks are executed. These records showcase that you’ve withheld federal income and Medicare taxes from the noteworthy employee wages. The payroll records also show the tax contributions an employee has made.

The backbone of an organisation is the people working in it. It is important to pay them timely without any mistakes. Their satisfaction is the utmost priority to the organisation. To do that, it is important to ensure that the payroll process is fast and reliable. 

An organisation can implement better payroll management by using payroll software. Payroll software can help simplify and automate the tedious part of payroll processing. It gives your employees more time to focus on other employee management strategies.

Conclusion

As the owner of the business, it is a huge responsibility to ensure your staff is paid for the work they do and for the number of hours they put into the work. To make that happen, you must ensure that your employee payroll meets all the requirements for proper calculations. It should not miss the required deductions, appropriate payment for hours worked, income taxes, and other considerations and benefits.

A lot of information needs to be tracked and recorded while calculating payroll. To ensure the accurate and foolproof calculation of payroll, the owner or the professional payroll service provider needs to follow a guideline. These guidelines ensure that the employees are paid their salary on time without any mistakes. 

Each employee is different, and their payroll calculation is also other depending on the work they do and the number of hours they work. So, the calculation is done differently for different employees. If you need more information regarding the calculation of payroll, seek assistance from Vakilsearch.

FAQ

How do you calculate monthly payroll?

To calculate monthly payroll, you need to determine the gross pay for each employee for the month. For salaried employees, divide the annual salary by 12 to get the monthly salary. For hourly employees, multiply the hourly rate by the number of hours worked in the month. Once you have calculated the gross pay for each employee, you can subtract any deductions to determine the net pay.

What is payroll in salary?

Payroll in salary refers to the total amount of money that an employer pays to their employees for the work they have done, including any additional earnings like bonuses or commissions.

Is payroll and salary the same?

Payroll and salary are not the same. Payroll refers to the total amount of money that an employer pays to their employees for the work they have done, including any additional earnings like bonuses or commissions. Salary, on the other hand, refers to the fixed amount of money that an employee is paid on an annual basis, regardless of the number of hours worked.

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