HR and payroll professionals are vital to the success of all businesses. People often think that the success of a company is based on ROI, revenue, sales, etc. Employee compensation is often overlooked. Since employees keep a business operating smoothly, a mishap with a paycheck could result in the employee leaving. HR and payroll specialists need to ensure payroll is accurate every time.
What is Payroll?
Most employees don't think much about payroll, only to the extent of checking their bank account to see if they got paid or picking up their check at the end of the day. Unless you are a payroll or HR professional, the average employee has no idea what goes into running a smooth payroll.
What are the Responsibilities of Payroll?
A payroll professional is typically a part of a company accounting team. They are responsible for ensuring all employees are paid what they are owed on time. They keep track of employee wages, hours worked, vacation time, and other data. Depending on the size of your business, some payroll professionals may have more responsibilities.
For example, they may be in charge of the following:
- Record keeping
- Reviewing timesheets/working with HR to solve time issues
- Sending timesheet reminders to employees
- Processing payroll and special payouts
- Distributing W-2's
- Verifying salary/rate changes
- Verifying benefits deductions
- Verifying new hires
- Terminating employees
Glassdoor states a payroll specialist doesn't necessarily have to be an accountant. A high school diploma is a minimum requirement to become a payroll specialist, although a bachelor's degree in business or accounting is preferred. If you have a vast knowledge of tax and wage laws, standard fiscal procedures, and excellent computer skills, you can succeed as a payroll specialist. There are payroll-related certifications you can obtain to become a better candidate. These include Professional Bookkeeper, Fundamental Payroll Certification, Certified Payroll Specialist, and Certified Payroll Professional.
Businesses can use a Professional Employer Organization (PEO) to run their payroll. A PEO is a firm that provides services to a business that wants to outsource employee management tasks. These tasks can include employee benefits, payroll and workers' compensation, recruiting, and risk/safety management. This is joint employment or co-employment because the PEO is not an employee of your business; they are employed by the Professional Employer Organization.
Payroll issues paychecks to employees. Payroll professionals gather hourly employees' timesheets and convert them into wages, along with calculating overtime and holiday pay. Depending on your industry, payroll may be responsible for paying commission, splitting tips, reimbursing expenses, and awarding bonuses. They must keep accurate record-keeping for a business. Furthermore, all money flows should be accounted for and recorded accurately in case of an audit by state or federal authorities.
Payroll has the duty of making sure taxes and benefits are deducted from employees' paychecks, ensuring the correct amounts of state, local, and federal income taxes are withheld, along with FICA taxes for Social Security and Medicare. If your employee chooses to have benefits taken out, such as healthcare, their union dues, or a 401(k) contribution, these must be deducted accurately.
Holiday and Weekend Pay
Payroll can run into issues when the payday is on a weekend or a holiday. The person who is responsible for running payroll should create a schedule of the year, detailing when payroll falls on a weekend or a holiday. Having a schedule will allow payroll professionals to plan ahead so they aren’t left scrambling when payroll rolls around. When payroll falls on a holiday or a weekend, payroll can be run early, delayed so it’s received the following day, or run as normal with payment falling the next business day.
Hourly employees are not required by the federal government to be offered paid vacation. If a business is willing to offer paid vacation time for an hourly employee, the organization must decide how much time they are willing to offer. The payroll specialist will need to calculate the amount of time taken for vacation and the hourly rate of the employee for an accurate paid time off. For salaried employees, their pay remains the same when they take vacation time.
The Family Medical Leave Act was created in 1993 requiring employers to ensure job protection for employees who have to take unpaid leave due to qualified medical or family reasons. If you need to take a leave of absence for one of the reasons covered in the FMLA, your job will remain secure but you will not be paid. During the leave, you are not able to accrue paid time off.
What Are the Steps to a Successful Payroll?
There are several steps required to properly track and issue payroll. Your organization must be known to the federal and local government as a business entity to begin running payroll. The appropriate accounts to hold funds for paying taxes and fees must be set up for running a business. The following tasks should be completed before running payroll and then distributing the correct funds to accounts.
Identity numbers and accounts:
- Employer identification number (EIN)
- Establish state and local tax IDs
- An Electronic Federal Tax Payment System account (EFTPS) to pay federal taxes
- State and local government employer ID numbers
- State unemployment insurance account
- A state new-hire reporting account
- A state workers' compensation insurance account
Understanding Timesheet Rounding
Timesheet rounding refers to when an employee’s timesheet is rounded up or down to the nearest 5, 10, or 15-minute marks upon clocking in and out. Fair Labor Standards Act (FLSA) and the Department of Labor (DOL) do legally allow for punch rounding as long as it meets certain criteria and does not favor the employer. Certain states have different rules when it comes to rounding. To ensure your business is in compliance, check the guidelines in your state.
Gathering Employee Information
When you hire a new employee, you'll need to collect their social security number, bank account information, and tax withholding information. You will need to know their pay rate, benefits enrollment, 401(k) contributions, and additional information that could affect their pay.
Information that you'll need from every employee:
- Full name and address
- Determine if they are an employee or independent contractor
- Social security number or EIN from IRS form W-4 (employees) or Form W-9 (contractors)
- Pay rate
- Direct deposit account information
- Exempt or non-exempt
- Form 1-9, verifying eligibility for U.S. employment
- Whether they are subject to garnishment
Tracking Employee Classification
When hiring a new employee, the business will need to establish if they have an employee or an independent contractor. An independent contractor is someone who is self-employed. Some businesses will bring an independent contractor on to complete a job for their business. If a business is unsure if they have an independent contractor or employee, they may perform the Common Law Test. The Common Law Test states that if an employer has the right to control what work will be done and how that work will be performed, then an employer-employee relationship does exist and that individual is by definition an employee. As an employer, it is important to classify employees as employees instead of independent contractors to remain in compliance with the IRS.
Choosing a Pay Schedule and Pay Method
Most organizations pay their employees on one of four pay schedules. These pay schedules include weekly, bi-weekly, semi-monthly, or monthly. Each pay frequency has its own set of benefits, but it depends on what works best for your organization.
Selecting a payment method comes down to the convenience of the business and for the employee. The following are standard payment methods:
- Direct Deposit: money goes directly into an employee's bank account.
- Pro: secure money transfer, convenient, and minimal delay
- Pro: employees can engage in a wider variety of savings - savings account (56%), regular account (42%), and retirement (33%)
- Con: the possibility of incompatibility with unbanked employees
- Cash/Check: actual currency or paper check.
- Pro: requires less setup
- Con: Printing checks cost money, and employees are more vulnerable to fraud
- Pay Card: an alternative method of a debit card payment. Loads funds every payday.
- Pro: No bank required, is as fast as direct deposit and more secure than paper checks or cash
- Con: Physical cards can be lost or stolen
Mistakes can happen when processing payroll. One mistake may be that your employee’s direct deposit doesn’t make it into their account.
How Does Payroll Manage Taxes?
Payroll manages the withholding and submitting of employee taxes. Both employees and the organization owe taxes to the federal and state government. Some are required to be paid on a monthly or bi-monthly basis.
State and Local Taxes
Most cities and counties collect taxes, but these can vary from state to state. It is always best to check the requirements in your state and city/county.
Federal Income Tax
The IRS collects the federal income tax based on an employee's amount and the number of allowances they claim on form W-4. If you are looking for more information on this, check out Publication 15.
Social Security and Medicare taxes are considered to be the Federal Insurance Contributions Act (FICA). Typically, employers will contribute FICA taxes as a direct match with their employees. Tax rates for FICA change every year. To keep up to date with withholding calculations, see the IRS website.
- FUTA: Federal Unemployment Tax Act requires employers to pay an unemployment tax. They must contribute 6 percent of the first $7,000 paid to each employee yearly.
- SUTA: The State Unemployment Tax Act is the state equivalent to the FUTA. Each state determines its own SUTA, so it is essential to stay updated on this information.
How Are Benefit Premiums and Payment Deductions Managed?
Employers have the option of offering benefits to their full-time employees. If they do, they are responsible for paying benefits and for managing contributions related to benefit funds, deducting the contributions and premiums from paychecks whenever payments are required.
- HSA/FSA: Health savings account (HSA) or flexible spending account (FSA) are high-deductible health plans that help offset medical expenses. Contributions to these accounts are pre-tax.
- Additional insurance: supplemental insurance, such as dental and vision.
- Retirement funds: offerings of a pre-tax retirement fund, such as a 401(k).
The Fair Labor Standard Act (FLSA) states that you must keep payroll records for at least three years in a secure location. If the Department of Labor asks for the information, it must be made available within 72 hours. The following information should be kept for at least three years.
- The employees' full name and social security number
- Total hours worked each week
- The basis on which an employees wages are paid
- The employees' regular hourly pay rate
- Total daily or weekly straight-time earnings
- Total overtime earnings for the workweek
Other information, such as time cards, is required to be kept for two years. The following information should be kept for two years for tipped employees.
- Record of the employees' reported tips on a weekly or monthly basis.
- A form that reflects tip credit applied
- Documents showing any changes in tip credit were given to the employee in writing in each week where a change occurred
It is important to check state laws for record-keeping requirements, as they may be different from state to state.
What Kind of Options Exist for Payroll Processing?
While there are many different options for payroll processing, it often comes down to whether the payroll will be managed internally or with a partner, and whether it’s more manual or more electronic.
In-House Payroll vs Payroll Software
In-house payroll means someone within the business manages the functions of calculating and issuing paychecks, handling taxes, and ensuring the business stays in compliance with local, state, and federal regulations. A payroll software payroll system allows a business to outsource payroll to another business that processes payroll, provides paychecks and direct deposit, ensures compliance, and files taxes for a business. Some businesses may need to still run payroll with a cloud-based system, but these systems automate a large portion of the process. Platforms such as Excel or Quickbooks allow you to run payroll but they do not file taxes, ensure compliance, or many other benefits that cloud payroll can.
Paper vs Paperless
Completing the payroll process on paper and trying to calculate payroll hours and minutes manually can become an overwhelming task. As a company, you are required to keep specific documents for a period of time for the Fair Standard Labor Act (FSLA). A paperless solution allows you to keep track and secure employee information in a single location. Paperless solutions allow businesses to eliminate the risk of misplacing important information or the risk of losing documents in a fire or flood. Gartner estimates that 3% of a company's revenue is spent on paper, printing, filing, and maintaining information. Furthermore, the average employee uses 10,000 sheets of paper each year. Paperless payroll is an eco-friendly way to save the environment and business expenses.
Streamlining the Payroll Process
Where to Begin When Looking for a Payroll Partner
When a business is looking for payroll, you should evaluate how often you are running payroll, how big your budget is, and how many employees work for your company. How much you are willing to spend determines what payroll processes you can choose. The three most common ways of running payroll are in-house, with a certified public accountant (CPA), or outsourcing. In the process of looking, you should do your research, compare and contrast, and read reviews of different vendors to make an educated decision.
Features for a Smoother Process
Payroll software companies offer a wide range of options to help small and large businesses. While payroll is an essential feature, there are other features that aren’t essential but can make the business run more efficiently.
Helpful features include:
- Time and Attendance - used to track and monitor when employees clock in and out
- Onboarding - integrating a new employee into the company's system
- Applicant Tracking - handles recruiting and hiring electronically
- Performance Reviews - an evaluation of an employee, department, or organization as a whole. Software platforms allow businesses to customize performance reviews, log and track performance, and implement merit bonuses for good performance
- Benefits Administration - designing and managing employee benefits packages
Reasons to Consider Outsourcing Payroll
An easy way to streamline payroll processes is by outsourcing your payroll. Payroll software companies offer many features to help create efficient workflows and fewer errors. Manual data entry can result in .5-4% of errors, according to OPIN Systems.
Using software enables you to go paperless and protect the environment by pushing for electronic pay and pay statements. Employees can access their pay stubs, W-2s, schedules, and benefits information all in one place. Allowing employees access to their information can eliminate confusion and errors in pay.
Many payroll services also offer Human Resource Management abilities, like performance evaluations, benefits administration, or a time and attendance platform that integrates with payroll. Streamlining payroll processes provides an easy solution to payroll issues while being in one location. This streamlined process frees up HR and payroll specialists time to complete other projects.
Dominion Systems is a single-source payroll and HR platform that offers payroll, onboarding, benefits administration, talent management, and time management. We can help you streamline your payroll process with ease, allowing you to have more time to focus on your business.
With Dominion, we guarantee tax filing to ensure you are always compliant. The IRS typically gives out 40 million tax penalties each year, and with Dominion, you won't be one of them. In fact, in 2020, we ended with zero tax penalties for our clients. If you would like to become one of the many businesses we have helped over the years, schedule a demo with us to find out more information about our offerings!