Happy employees are essential for the growth and development of any business. Many employees look forward to their paydays, hence, good employers should pay their employees accurately and on time. For accurate employee payment, it is essential to make the right deductions, add the deserved allowances, and contribute to superannuation. This practice is vital, not just for your employees, but for the overall financial health of your business.
What is Payroll?
Payroll is a huge topic for business owners, so what exactly is a payroll?
Payroll is the total amount of wages that a company pays its employees. Running payroll can feel complex and difficult without the right tools and knowledge. But there is no need to fret. In this article we will help you understand the most important concepts you need to know about payroll accounting, so you can always keep your employees happy.
What is payroll accounting?
Payroll accounting is the recording, filing and tracking of employees’ compensation. These include wages, salaries, commissions, bonuses and overtime pay. It also includes employees withheld taxes, health insurance, retirement accounts and wage garnishments. Let us take a deeper look at each of these terms and how it should be recorded.
Running payroll involves several things. First, you need to take the employee’s gross pay and deduct payroll and withholding taxes, and deductions then you’ll get the net pay. For independent contractors, you can simply issue them a check and they’ll be responsible for their own taxes at the end of the year.
Keeping payroll is important because it keeps you legally compliant. It also keeps your employees protected. If you’re not running them on payroll, they won’t be eligible for unemployment and other benefits in the events of natural calamities and other unfortunate events.
Components of a Payroll
1. Employee’s Information
These include your employee’s name, address, date of birth, social security number and other essential information about them.
2. Salary or Hourly Wage
A salary is a fixed amount you pay your personnel every pay period. A wage is an amount you pay on an hourly rate. The payroll must also reflect the overtime pay when necessary. Overtime pay is 1 ½ times the employee’s ordinary rate for the first three hours of overtime and twice the ordinary rate thereafter if the employee is offering the work on Mondays to Saturdays. If you ask your employee to do overtime work on Sundays, you need to pay twice their ordinary rate of pay.
3. Employee’s Time
Tracking employees’ time is helpful in determining wages and profitability.
These are amounts withheld from the employee’s paycheck. These include tax payments and absences
5. Payroll Withholdings
These are government imposed contributions (good example here are PAYGW and Medicare) shared by the employer and employee. The employee portions of these government imposed contributions are withheld from the paycheck. Then you take your employer contributions, add it in, and send it to the various collecting authorities.
Benefits are various types of non-wage compensation. These include payments for health and accident insurance, retirement funds, and other perks that your company offers.
Allowances are any additional amount given to employees for work-related expenses. An example of this is petrol or food allowance for when they need to use their own cars and purchase food for work-related purposes. Allowances can be tricky because some are included in the wage, while others are given to a third party, such as mobile network providers or rent. Some allowances also affect taxes.
Gross Pay vs. Net Pay
Gross pay is the amount of money your employees receive before any taxes and deductions are taken out. The net pay is the actual amount of money deposited in your employee’s account after all the deductions have been made. Example an employee might have a gross monthly income of 5,000 AUD a month, but the net pay they receive could only be 3,500 AUD (Depends on personal circumstances).
How to Calculate Net Pay?
Net pay= gross pay–(taxes withholdings + deductions)
Ways to Process Payroll
Here are a few different ways to process payroll:
1. Manual Payroll (DIY)
This is the most tedious and time-consuming way to do payroll. In manually computing for payrolls, you either use a calculator and paper or use Excel to calculate the numbers and figure out the amount of the net check based on the calculations you’ve come up with.
This method has a high risk for human errors, especially if you have several employees to pay.
2. Payroll Software
A payroll software gets the basic information you need- the same kinds of things you write or input in your Excel spreadsheet. You simply plug these into your software and it would calculate the net checks, send in the payments and the payroll taxes for you and pay your employees.
A payroll software, however, may be too expensive for small businesses. Mastering the use of the software may need the guidance of an expert. Software updates may also cost you an extra amount of money.
3. Outsource Payroll
In this method, you outsource payroll to a different service provider that specifically focuses on running payroll. You can simply give your information to them and they would do it for you on a time frame you set at a very reasonable price.
ACT Bookkeeping Services work with business owners around Australia to help them efficiently manage their payroll system and decrease cost in maintaining and managing an in-house payroll. We offer reasonable rates, superb services and minimize your compliance risks by keeping you updated with tax laws and other regulations. We also ensure that your organization meets requirements on time.