What is payroll and how is it calculated?

Unless you’ve been involved in the payroll process, it can seem deceptively simple. Burgeoning entrepreneurs or executives may assume all that’s involved is tallying employee timesheets and issuing payments. In reality, payroll processing is much more complex and payroll departments are responsible for a lot more than making sure workers get paid.

To shed some light on the subject, here’s an article about the various aspects of payroll processing and how they can be greatly simplified with the right software platform.

To begin, it should be understood that the term “payroll” has a few different common definitions. For instance, payroll is often used to refer to a company’s total salaried and hourly workers and the expenses associated with paying them. And while companies may consider independent contractor wages to part of their labor costs, legally only employees are “on the payroll.”

Payroll is also regularly used as shorthand for a company’s payroll department (e.g., “all timesheets need to be turned into payroll by Friday”). The phrase “closing out payroll” is used to describe the process of completing the payroll settlement process before funds are distributed.

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One of the most important components of payroll processing is proper worker classification.

The most common types of worker classifications are exempt, nonexempt and independent contractor. Exempt workers are full-time salaried employees who are exempt from overtime, minimum wage and other regulations listed in The Fair Labor Standards Act (FLSA). Nonexempt workers can be full or part-time hourly employees who are protected by the FLSA, and independent contractors are freelancers who are paid under specific pre-agreed-upon terms.

The Department of Labor has established strict standards for each class that involves factors like industry, job title and pay rate. Moreover, the Internal Revenue Service has different tax regulations for employees and contractors. As improper employee classification or tax withholding can be very costly for a firm, it’s a good idea for operations of any size to use payroll software that automatically handles these concerns.

To reiterate, calculating payroll involves more than just reconciling timecards and cutting checks, but that is a good place to start. Traditionally, an organization’s payroll department is responsible for ensuring that workers are paid in accordance with their contract terms and federal, state and regional regulations before distribution are made. That means accounting for things like:

• Wages: All employees need to be paid in accordance with hours worked within a specified period and the term of their contracts. That also means making payroll adjustments for overtime, holiday, sick, bereavement, vacation and severance pay, as well as commission, tip and reimbursement payouts.
• Time card errors: Generally, a firm’s payroll department is responsible for fixing punch errors. For example, if an employee forgets to clock in or clock out for a break or at the end of a shift, those errors will need to be corrected before the end of a pay period.
• Deductions: Before pay distribution occurs, employees’ wages must be deducted for federal, state and local taxes as well as applicable health benefits, garnishments, retirement plans and life and workers’ compensation insurance.

Because an organization can be saddled with significant civil and criminal penalties for incorrect or incomplete processing, accurate payroll calculation is critically important. So businesses can benefit from using payroll calculator software because it can greatly reduce those errors.

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When a business wants to hire new personnel, it must notify specific federal government agencies so the candidate’s legal ability to work in the United States can be verified. Once that happens, a government agency will need to send paperwork—such as W-4 forms for employees and 1099s for independent contractors—to ensure that their wages are being taxed appropriately. This set of responsibilities is known as payroll reporting.

Similarly, payroll record-keeping refers to the mandate requiring employers to retain records of all employment contracts, timecards, tax documents and payroll distributions and independent contractor payments.

Additionally, corporations are legally responsible for withholding appropriate federal, state and local taxes from their employees’ wages and documenting the deductions. Companies are then required to forward the resulting tax revenue and paperwork to the appropriate government agencies.

Lastly, payroll departments are also responsible for distributing company funds to employees and freelancers. Like every other part of the payroll process, distribution can be optimized with the use of HCM software. Once payroll settlement has been completed, employers pay their workers via direct deposit, paper check or payroll debit cards. 

NCR’s software can be very helpful with human capital management (HCM) processing because it features tools that make payroll calculation a breeze. And, as a fully integrated HCM platform, NCR’s payroll software allows employers to manage their reporting, record-keeping and tax filings from the same dashboard. Ready to learn more?