Payroll Explained: The 2024 Ultimate Guide

Payroll is one of the most essential aspects of running a business. While it might seem like a simple task, handling payroll involves numerous components, including timekeeping, tax withholding, benefit management, and more. A formalized payroll process not only ensures employees are paid accurately and on time, but also helps businesses avoid costly mistakes such as fines or legal issues. In this ultimate guide, we will explain everything you need to know about payroll in 2024.

What Is Payroll?

Payroll refers to the process of paying employees for their work. This process includes tracking hours worked, calculating wages, withholding taxes, managing employee benefits, and ensuring employees are paid on time. In medium to large companies, payroll is typically handled by the finance or human resources department. However, in smaller businesses, an accountant or even the business owner may take charge of the process.

Payroll can be a complex task, as it requires individualizing tax withholding, salary, and benefits for each employee. In addition, businesses must ensure taxes are withheld correctly and paid to the relevant local, state, or federal authorities.

Key Takeaways

  • Payroll is crucial for every business and is often one of the largest expenses.
  • Mistakes in payroll can lead to expensive penalties.
  • Payroll involves more than paying employees; it also includes managing tax withholdings, benefit contributions, and timely payments.
  • Payroll software can help automate the process and reduce errors.

How Does Payroll Work?

The payroll process typically follows a set of clear steps, and while each business’s process may vary slightly, it can generally be broken down into three main stages: gathering information, calculating pay and deductions, and remitting taxes.

Step 1: Gather Information

Before processing payroll, businesses need to gather essential information from each employee. This includes a completed W-4 form (for tax withholding), a W-9 form for independent contractors, state withholding certificates (if applicable), and Form I-9 to verify employment eligibility. Additionally, employees must provide bank account details for direct deposit, along with any forms related to benefits like medical insurance and retirement plans. The business must also apply for a federal Employer Identification Number (EIN) from the IRS.

Step 2: Pay Employees

Once the necessary information is gathered, businesses calculate each employee’s gross wages. This calculation takes into account the number of hours worked, their salary, and any other applicable deductions like tax withholding, health insurance contributions, and retirement savings. The net pay (after deductions) is then issued to the employee via direct deposit or check.

Step 3: Remit Payroll Taxes

After paying employees, businesses must ensure that the taxes withheld from employee paychecks—along with the employer’s share of payroll taxes—are remitted to the appropriate authorities. These payments are typically made to the IRS and state or local tax agencies. Businesses must also maintain records to stay compliant with tax regulations.

Payroll Frequency

Payroll frequency refers to how often employees are paid. Businesses typically choose between weekly, biweekly, semi-monthly, or monthly pay periods. Some states have specific requirements for payroll frequency, so employers must ensure they follow local laws.

  • Weekly: While convenient for employees, paying weekly can quickly become costly due to the extra administrative time and processing fees.
  • Biweekly: This is the most common payroll frequency, as it is cost-effective and simpler to manage. Employees are paid every two weeks, which balances both the employer’s and employee’s needs.
  • Semi-Monthly and Monthly: Paying employees twice a month or monthly can be more challenging to manage and may cause cash-flow issues for employees who rely on regular paychecks.

In many cases, biweekly payroll is considered the “sweet spot” for both employers and employees, providing a good balance between administrative simplicity and cost.

Employer Payroll Responsibilities

Employers have several critical responsibilities when it comes to payroll. These include:

  1. Accurately Calculate Taxes: Employers must calculate their share of federal and applicable state taxes, including Social Security (FICA), Medicare, and unemployment taxes (FUTA).
  2. Deduct Taxes and Benefits: Employers must deduct the correct amounts for taxes and employee benefits, such as health insurance and retirement plan contributions.
  3. Timely Deposit Taxes: Taxes withheld from employees must be paid to the IRS and other relevant authorities on time through the Electronic Federal Tax Payment System (EFTPS).
  4. Maintain Payroll Records: Employers must keep accurate records of employees’ hours worked, wages, and tax payments in case of audits.
  5. Provide Payment Summaries: Employers must provide employees with annual summaries of their earnings and taxes for filing their own tax returns.

Ways to Process Payroll

There are three main methods businesses can use to process payroll: manually, outsourcing, or using payroll software.

  1. Manual Payroll: Some businesses, especially small ones, may handle payroll manually using spreadsheets or online calculators. However, this method can become complicated, especially when managing multiple employees with different pay rates and tax withholding requirements. It’s also prone to human error and can be time-consuming.
  2. Outsourcing Payroll: Many businesses choose to outsource their payroll to an external payroll provider. This option is typically more efficient than manual payroll, as the provider handles calculations, tax filings, and compliance with labor laws. Employers simply need to provide the necessary data, such as hours worked and employee information.
  3. Payroll Software: For businesses that want to keep control while automating some tasks, payroll software is a great solution. Payroll software automates calculations, tax filings, and record-keeping, reducing the risk of human error. It also keeps businesses up to date with changing tax laws and can save time during payroll processing.

7 Steps for Processing Payroll

Here’s a quick overview of the payroll process in seven steps:

  1. Record Employee Hours: This can be done manually or using time-tracking software.
  2. Calculate Gross Pay: For hourly employees, multiply the number of hours worked by the hourly wage. For salaried employees, divide the annual salary by the number of pay periods.
  3. Determine Deductions: Deductions include taxes (federal, state, and local), benefits, and retirement contributions.
  4. Figure Out Net Pay: Subtract deductions from gross pay to get the net pay.
  5. Pay Employees: Issue paychecks via direct deposit, check, or pay card.
  6. Pay Payroll Taxes: Deposit taxes through EFTPS.
  7. Maintain Records: Keep detailed records for auditing purposes and compliance.

Conclusion

Payroll can seem overwhelming, but with the right processes in place, it becomes manageable. Whether you’re handling it manually, outsourcing it, or using payroll software, the key is ensuring employees are paid correctly and on time while staying compliant with tax and labor laws. By understanding payroll, businesses can avoid costly mistakes and create a smooth and efficient payment system for their employees in 2024 and beyond.