6 Facts You Need To Know When Setting Up A Payroll For Your Employees

Payroll is a company or organization's system of recording wages and salaries and paying them to employees. These systems often consist of computer software and may also include personal computers and other hardware. Nowadays, most payroll systems process pay periods that do not change from week to week or month to month. Payroll systems are usually custom for a specific company's or organization's needs. They must also meet local government requirements. Some payroll systems also handle benefits, such as medical insurance.

Facts You Need To Know When Setting Up A Payroll For Your Employees

Setting up payroll for your employees can be a little intimidating. The rules are complicated, and the process is tedious. It requires you to register for taxes and pay contributions. It can also be a delicate matter that requires you to avoid conflicts with unions. Additionally, you must understand the laws regarding overtime pay and exclusive benefits. It's a job that you can't afford to get wrong. That's why we've put together this guide to give you the six most important facts you need to know to avoid running into trouble.

What Constitutes Payroll?

In the United States, employers send out checks to their employees' paychecks each pay period. This is a form of payroll, which is the employer's responsibility. Payroll is a difficult process and can be challenging. However, software can ease the pain. For example, invoicing specialists at Prime Software suggest that a good rechnungsvorlage (invoice template) will create discipline and streamline the process. These payroll checks consist of the employee's wages minus any taxes and other deductions from the paycheck. When you run a business, it's essential to pay the right amount of tax. But, it's also important to know what is and isn't tax-deductible. The IRS has a host of rules about what counts as payroll and what is business income. Payroll includes any amount you pay to an employee as salary or wages for their work. This is a broad definition that includes bonuses, commissions, expense allowances, and vacation pay. You can break it down into the following:

  • Tips.
  • Bonuses.
  • Commissions.
  • Benefits (such as phone or gas allowances).

Business Payroll

How Classify Employees For Payroll

Classification of employees is the process of grouping employees according to the job description, duties, and pay scale. The purpose of this classification is to simplify payroll and human resource management. Many small businesses tend to hire part-time workers because it is cheaper and easier than hiring full-time workers. A full-time worker is more expensive for a small business because you have to pay the costs of a full-time salary (i.e., taxes, social security, insurance, etc.)

Companies and other organizations can pay employees in one of two ways: salary or hourly. Each method has its benefits. It's up to the organization's accounting department to determine the most effective manner for each organization. The formula for calculating salary and hourly wages is the same, regardless of the type of employee. The difference lies in how to calculate the figures and how to ultimately pay the tax.

Payroll Taxes

Exempt Versus Nonexempt Employee

Classifying staff as exempt versus nonexempt establishes which employees are eligible to be paid overtime wages. It also determines the salary, employer-paid benefits, and the right to take time off from work. So what makes an employee exempt from overtime pay?

When it comes to the Fair Labor Standards Act (FLSA), most employees in the United States are either exempt or nonexempt from overtime pay.

The FLSA establishes the terms and conditions of employment. It covers minimum wage, overtime compensation, record-keeping, and youth employment. Exempt employees do not have a right to overtime pay. If you are an exempt employee, you have a job duty that falls into one of three categories: executive, administrative, and professional. For employees to qualify for an exemption, they must meet certain standards regarding job duties and be paid on a salary basis. If you are a nonexempt employee, you are eligible for overtime pay.

Where Your Employees Live

Although it might not seem like a significant factor to consider, it does matter when it comes to payroll. The rule of thumb is to treat employees who live in the same city as employees residing in the same town. Otherwise, salespeople could be tempted to move to another city to take advantage of a lower sales tax rate, not to serve customers better. There could also be issues with resources, like cars, hotels, or meals, that may not be readily available in a new location.

How Much Payroll Tax Is Due

If you are a business owner, you have to pay payroll taxes. If you pay an employee, you have to withhold income tax from their pay and send it to the IRS. On the other hand, payroll taxes include two separate taxes that are withheld from each employee's paycheck. These are social security tax and medicare tax. The employee pays one, and the employer pays one. Unlike income taxes, payroll taxes are withheld before the employee receives his or her pay. He or she then gets a "stub," SSA-1099, indicating the tax amount.

Importance Of Payroll Record Keeping

Record keeping is the most critical part of the payroll system. This is because payroll record keeping is the system that keeps track of payroll transactions. The importance of payroll record-keeping is that it records all the payroll transactions. These are very important for the employer. Payroll record keeping allows the employer to view what the employee is receiving and what the employer is paying.

Adhering to the legal requirement of retaining payroll records for up to seven years is crucial to demonstrate timely and correct employee payment. Utilizing an automated paperless payroll system ensures that these records are not only securely archived but also easily retrievable when needed, emphasizing the importance of maintaining accurate and accessible payroll records for compliance and verification purposes.


Employees are paid for their work through payroll. When an employer pays a person for their labor, they must report the payment to the government. This results in paying taxes on said work. The amount of labor taxed depends on the employee's pay. All labor that exceeds a certain amount is taxed. That certain amount is the FICA taxable wage base. It is a tedious and challenging job but one of the necessary drawbacks of owning a business.

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