A Guide to Basic Payroll Terminology
Recently, I took a job working for a global human resources company in their client services department and underwent a 10-week training course in payroll. This was a new avenue of business that I had never been exposed to previously. During my training, I learned the basics of payroll.
This article will cover the terminology of payroll and its taxes, which is helpful when trying to learn how to perform the required duties.
First let's start with the definition of payroll, which is:
- Sending paychecks to employees, either by live check or direct deposit.
- Keeping records of employees' pay rates, tax withholding, deductions, paid time off, etc.
- Accounting for the total earnings of every employee in a fiscal year.
Gross Pay vs. Net Pay
What's the difference between gross pay and net pay. It's quite simple actually.
This amount includes the total of the employee's pay calculated before anything is taken out (such as taxes, deductions, etc). How do you calculate gross pay for either salaried or hourly employees?
- Hourly: The rate of pay multiplied by hours worked equals total gross pay.
- Salary: The set salary amount for employee for that pay period equals total gross pay.
This amount includes employee's gross pay, or total amount, minus all tax withholdings and deductions. The net pay equals what the employee is paid on their paycheck or direct deposit.
Verify Minimum Wage Requirements at Both the State and Federal Level
Contact your State Department of Labor or U.S. Department of Labor to learn what the law mandates for a minimum wage in your state. In an instance where your employee is subject to both federal and state minimum wage requirements, you are required to pay the employee the higher rate of the two minimum wage rates.
A method should be used to track each employee's time for when they clock in and out of work, for lunch, and any personal time off taken during the work day. This is especially important for hourly employees, as their hours worked are used to calculate their regular pay as well as any overtime. There are two common methods for collection an employee's time:
- Manual Punch Cards: This is a card which identifies the employee and is used to manually punch into a machine, which places a time stamp on the card. Later, a person in payroll manually enters that time into their system.
- Electronic Time Tracking: A magnetic card or a thumb stamp can be used to prompt a machine to electronically record the time for the employee. No one has to manually enter these times, as they are recorded at the time of the employee's clock punch.
Regardless of which method is used, the purpose is to record the employee's time accurately so that they are paid for the correct number of hours worked.
Regular Hours vs. Overtime
What's the difference between regular hours and overtime?
- Regular rate: This is the employee's regular rate of pay or straight pay. It is their normal rate of pay, for example $12/hour. This amount is multiplied by their first 40 hours worked.
- Overtime: If the employee works over 40 hours, they are paid overtime for the extra hours. This is their regular rate of pay, which is stated as time plus half of their regular rate of pay, which is stated as "and a half." You multiply this amount times the hours worked to receive their overtime rate.
For the above example, if the employee's regular rate is $12/hour, their overtime rate is $18/hour ($12 + $6 = $18). You can also calculate the employee's overtime this way: ($12 + ($12X0.5) = $18) or ($12 + ($12/2) = $18).
How do you calculate overtime if the employee worked 42 hours?
40 hours X $12 = $480 regular pay
2 hours X $18 = $36 overtime
Total = ($480 regular + $36 overtime) = $516 gross pay
Do you know how to calculate an employee's overtime rate of pay?
- Full-time employees: For employees that are not considered contract employees, the employer withholds taxes from their paychecks for federal, state, and local income taxes. Each employee's tax withholdings is determined differently based on their W-4 that they completed at the time of hire. Employers should make sure that they are withholding the correct amount of federal, Medicare, and social security for each employee.
- Contract employees: These employees are responsible for paying their own income taxes at the end of the year, as the employer does not withhold taxes from their pay.
New Hire Forms
There are several forms that need to be completed by the employee at their time of hire. These forms include W-4 for federal income tax withholding, a state income tax withholding form, and a form I-9 for employment eligibility.
- Job Application Form: Information in the job application can be used to enter into your payroll system regarding the employee's name, address, contact information, etc. This information can be verified, such as previous employers and/or education.
- W4 Federal Income Tax Withholding Form: This form provides information on the employee's marital status, number of dependents, and their elected additional withholding amounts.
- State Income Tax Withholding Form: You must first register with the state department of revenue agency as an employer in that state. They will inform you on which forms and how much tax to withhold for the employee.
- Form I-9 - This form is for employment eligibility verification and requires that the new hire provide their proof of eligibility, which may consist of their birth certificate or green card. The employer will verify this information, but it does not need to be sent to the state agency.
Other Important Things to Know
- E-verify: The employer can use the e-verify system to check their I-9 and compare it with federal databases to make sure that the employee is eligible to work in the US.
- State Employment Notification System: Employers must register their employees with the state, which allows the state to collect information and payments such as garnishments (e.g. child support, liens, etc.) from these employees.
This is a recurring period of time in which the employees are paid. This can be a weekly, bi-weekly, semi-monthly, or monthly period of time. Knowing the amount of pay per period per year is important for computing how much employees are to receive for each pay period.
- Weekly: 52 pay periods/year
- Bi-weekly: 26 pay periods/year
- Semi-monthly: 24 pay periods/year
- Monthly: 12 pay periods/year
Quarter and Year End Payroll Requirements
The following forms can be used to file employer taxes with the IRS or your state agency:
- Form 941 (Quarterly): This IRS form summarizes wages paid and is used by employers whether they are tax exempt or not. Every quarter, the employer will report the amount of federal payroll taxes withheld, social security taxes, medicare taxes, and any other related payments and/or withholdings.
- Form 940 (Annual): This IRS form is utilized by employers to report wages paid and federal unemployment taxes that were accrued on those wages subject to FUTA for the entire year.
- State Unemployment Taxes: Most employers pay both federal and state unemployment taxes.
- W-2 Form: Furnish W-2s to your employees prior to the deadline. You'll need to file W-2 forms with the Social Security Administration by either e-filing and/or filing out the actual forms.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.