Payroll processing consist of calculation of payments to employees for their work in the company – whether it is based on time or productivity, calculation of benefits, and statutory deductions. Payroll needs to be processed by each company periodically. It may be processed weekly, bimonthly, monthly or daily .
Payroll calculation is a complicated process that varies from company to company. Each company may have its own payroll structure consisting of various payroll components that may be unique to that company only. In addition, many location specific laws such as labor welfare act, Payment of salary and wages act, and the Minimum wages act affect the payroll calculations. Under minimum wages act, the employees need to be given some mandatory salary.
Payroll processing involves accurate payroll calculations, disbursal, payslip generation, and managing payroll taxes and record keeping compliance. All these activities cannot be rushed into and must be performed to ensure that employees do not get erroneous paychecks and all statutory compliances are met.
Employees are hired to do a specific job at a specific rate of pay. On a regular date determined by the company, these employees are paid. Some employees may be paid at different times, depending upon their status.
To prepare employee paychecks, the employer first calculates the pay for that pay period. Then the employer must withhold FICA taxes (Social Security and Medicare), and Federal and State income taxes from each paycheck. The employer may also deduct other amounts from the paycheck. These might include retirement plan and health plan contributions, union dues, and charitable contributions.
But “doing payroll” isn’t complete yet. After the employer distributes paychecks, other calculations must be done.
The employer must calculate and set aside amounts deducted from the employee’s pay, to be paid later. The employer must also set aside an amount for the employer’s contribution to FICA taxes and for unemployment taxes.
“Doing Payroll” also includes record keeping. A separate record must be kept for each employee, showing amounts paid for each pay period, for end-of-year reports. Records must also be kept of employee authorizations and any changes in pay.
If this all sounds complicated, it is. That’s why many employers outsource payroll, sending it to a payroll processing service or to a bookkeeper or accountant.