Payroll 101
Welcome to Payroll 101!
As part of our commitment to be a resource to the business community, we are proud to present CompuPay’s Payroll 101 program. Created by CompuPay’s team of payroll training experts, this series is designed to review fundamental payroll concepts that will answer many of your payroll-related questions.
What is payroll?
Payroll is the process used to pay employees accurately and on time. The most obvious job of payroll is to issue payment to employees, but few employees understand how complicated this task can be. The functions of payroll vary from company to company. Some common examples of payroll department responsibilities are:
*ACH = Automated Clearing House
The Automated Clearing House is a nationwide mechanism that electronically processes funds transfers including direct deposit payroll payments and payments to contractors and vendors.
Paying employees
Balancing payroll data
Reconciling payroll data
New hire paperwork
Inputting new hires
Collecting/inputting time data
Depositing and reporting taxes
Collecting/inputting time data
Creating ACH* files
Processing deductions
Reporting payroll data
Record keeping
Verifying the integrity of pay data
Distributing payroll checks and pay stubs
Modifying existing employee files
Maintaining compliance with all tax laws
Payroll Basics
When it’s time to pay an employee, the employer calculates the gross* pay check amount. If the employee is paid on an hourly basis, the gross amount is calculated as number of hours worked times rate of pay. If overtime is paid, the calculation is the number of overtime hours worked multiplied by one and one half the rate of pay. Salaried employees can either be paid a flat salary every pay period regardless of how many hours they worked, or they may be paid overtime pay under certain circumstances.
After gross wages are calculated, taxes are deducted from the employee’s check. Some taxes are calculated as a percentage of gross wages, others are based on marital status and number of exemptions (as indicated on Form W-4) as well as other factors. These taxes are divided into two different categories: federal taxes (Social Security, Medicare and federal withholding) and state taxes (state withholding, state disability insurance, local taxes, state unemployment) when applicable.
There may also be other deductions that affect the employee’s check: health insurance, 401(k), uniforms, loans, etc. In addition, the worker may be reimbursed for expenses incurred on behalf of the company: mileage, general expenses, lodging, etc. Deductions reduce net (or take home) pay, while reimbursements increase net pay. Below is a sample of what a pay stub might look like:
The employer must also contribute payroll taxes for each employee that is paid. Employer taxes include Social Security, Medicare, federal unemployment, and state unemployment. Employers pay these taxes directly and employer tax contributions are not listed on pay stubs.
The material contained in this document is for informational purposes only and is current as of the date of publication. CompuPay is not a legal advisor or financial advisor and makes no claims as such. For financial or legal advice, please seek the advice of a professional.