Salaries are the main motivating factor in one’s work. Besides the actual amount, a no less important factor is the correctness of its calculation and timely payment. For an employer, wages often fall under the main expenses that need to be covered periodically and without delay. Moreover, it is necessary to make mandatory tax payments, which are also a significant expense item.
This significance of payroll accounting in the system of relations between the employee and the employer, as well as the government, requires a careful approach to the establishment of payroll systems. There are three options for doing payroll: do it yourself, hire a part-time accountant, and use a payroll software solution. As an employer, your essential responsibilities are listed below:
- Pay employees as well as withhold correct taxes and deductions
- Pay your own payroll taxes and those withheld from employees
- File tax forms on a monthly, quarterly, or annual basis
These three steps essentially represent the whole payroll cycle. Payroll management is a process of gathering salary-related information, updating it in a timely manner, and disbursing salary within the payroll cycle to the employees. Automation of the full cycle of payroll accounting for all categories of personnel ensures a reduction in labor costs, minimizes calculation errors, and guarantees the formation of all necessary reporting for regulatory authorities.
The first step in payroll accounting would be calculating your employee’s gross pay. This will be based on either the predetermined salary or the hours an employee worked during the pay period. When it comes to calculating the hours worked, many employers find that time tracking software saves a ton of time and stress for both you and your employees. Once you know how many hours an employee worked, you would multiply it by the hourly rate and add any bonuses, if applicable. This gross pay is reported to the appropriate government authorities.
Your next step would be to calculate the deductions. The tax deductions are based on the information employers collect from future employees during the hiring process as well as applicable tax rates. One of the advantages of working with independent contractors is that you simply write a check and it is the contractor’s responsibility to pay the taxes.
If you decide to hire employees, however, then you are required by the federal government, most state governments, and some local governments to withhold taxes from their paycheck and remit those funds to the appropriate tax authorities. In many instances, companies will also withhold or deduct money for things such as insurance premiums and IRA contributions.
Now, that you know the gross pay of your employees and their tax deductions, you can calculate how much in taxes you owe to the government as an employer. These are also calculated based on the laws and tax rates applicable to your business and its location. The employer would set aside the money taken from the employee’s pay and the payroll taxes they owe to pay it when the time comes.
Once you are done with all the calculations, you are ready to produce and send a payslip to your employees. If you were using an online payroll software, most, if not all, of the steps we just described can be done for you automatically. If your employees agree to receive their pay via direct deposit, it will take you only a couple of clicks to send them their hard-earned money. If necessary, you would need to write a physical paycheck and hand it to the employee or mail it.
Finally, you need to report the gross pay and tax deductions to the government authorities. In addition, you are required to pay the payroll taxes. It is important that you do not use the tax deductions you set aside earlier for other business purposes in order to be able to pay the payroll taxes on time and without and issues.
As you can see, payroll accounting can be time-consuming, but if you know what you are doing, it is not that complicated. The accounts affected during the whole payroll accounting cycle include Accrued payroll, Taxes payable, Garnishments payable, Payroll expense, Payroll taxes expense, as well as Cash.