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An Employer’s Complete Guide to Payroll And Payroll Deductions


April 8, 2021

Payroll Deductions

Payroll can be the biggest overhead expense of the business, and it could get complicated. Furthermore, the process of payroll deductions makes the process even more complicated. However, by understanding every component of the payroll better, you would be able to understand the finances of your business better as well. This will help employers to stay compliant with the labour laws and different payroll deductions.

What is payroll?

Payroll is defined as the process of paying salary to the employees. Running the payroll includes calculating the earnings of the employee and deducting different government payroll deductions from the earnings.

Payroll can also be used to refer to:

  • Yearly records of staff wages
  • Distribution of staff paychecks
  • The financial records of the employees by the business

  1. Gather data

While recruiting a new employee, collect information about their payroll. Moreover, companies need to withhold certain amounts as payroll deductions to pay the government taxes on behalf of the employees, as well as to pay for employee benefits.

  1. Calculate the net pay

The net pay of the employee is what he/she will get in their bank accounts after all the standard payroll deductions or withholdings for taxes and benefits payments from the gross salary. You may also need to calculate the withholdings for social security taxes, local taxes if any, and medicare taxes.

  1. Issue payments

You can issue payment to the employee either via direct bank deposit or by issuing the paycheck.

  1. Report taxes

An employer needs to submit the tax filing for tax withholdings to the government tax department on behalf of the employee. You also need to report about different contributions such as provident funds, retirement benefits, payments for unemployment, medical taxes, and other applicable taxes.

  1. Pay taxes

The employer needs to forward all the benefits and tax payments to the appropriate government tax authorities, provident funds and different assigned benefits providers.

The components of payroll

There are multiple components included in the payroll process, which could be divided into 3 sections: employee information, wages and salaries and deductions.

Let us check them out in brief.

  1. Employee information

You need to gather some information from the employees before you pay them their salary. Your employees need to fill the W4 form. Each employee should fill the form at the time of hire. The W4 form provides information about the income tax deductions of the employee. The form also includes the personal information of the employee, including, their name, social security number and their address. All this information will allow the employer to process the payroll and distribute the salary to the employees. It is recommended that employees should check their tax deductions every year.

  1. Wage and salaries

You could pay the employees on an hourly basis or an annual salary. They are entitled to receive a fixed amount as pay during every pay period. Hourly employees or wage earners, earn as per the fixed hourly rate. The employee’s annual statement might show the gross pay, overtime pay, time worked, reimbursements and benefits contributions, net pay and additional income.

  • Time worked:
    The employee time or time worked is defined as the number of hours the employee has worked during the pay period. Most companies require their hourly employees to track their timings. Salaried employees can also track their timings if they are paid for their overtime.
  • Gross pay:
    Gross pay is the total income of the employee before the mandatory payroll deductions. Gross pay is the potential earning of an employee.
  • Reimbursement and benefits contribution:
    Benefits are the contributions that the employer provides to the employees. The common benefits types include retirement plans, health insurance, and paid leaves. Employers need to deduct most of the common benefits of the wages of the employee. After submitting proper documents, the employee is eligible to receive the reimbursement in that deducted amount.

Payroll Deduction examples:

The best example is that of the reimbursement towards health insurance, which is usually provided after an annual health screening. Another example of salary deductions is the education reimbursement, wherein, the employer compensates the employee for attending courses that are linked to their existing job or for pursuing a college degree.

  • Overtime pay:
    Many employees are eligible to receive overtime pay as mentioned in the labour policy. The labour policy establishes that overtime pay for the nonexempt employees is 1.5 times their regular pay rate. The overtime pay applies to the extra hours worked by the employees over normal work hours.
  • Additional income (commissions, bonuses and tip):
    The additional income might apply to the sales reps, service staff and any individual who is eligible to receive bonuses. The common types of extra income include commissions, bonus and tips on sales and other activities related to the business. State and local laws may also tax such types of extra compensation above the numeral payroll deductions.
  • Net pay:
    After all the payroll deductions, the amount that remains is called the net pay of the employee. It is also termed as the ‘take-home salary’. The net pay is the actual amount the employee receives on their payday.
  1. Deductions

Deductions or payroll deductions is the amount removed or deducted from the paycheck of the employee as tax and for other purposes. The most common form of payroll deductions includes payroll withholdings, payroll taxes, benefits deductions and wage garnishments.

  • Payroll taxes:
    Taxes are a common type of payroll deduction. The employer withholds a certain amount as tax from the gross pay of the employee. Payroll taxes usually refer to medical taxes and social security. Similarly, the employee is also liable to pay income tax which is deducted from the pay of the employee.
  • Payroll withholdings:
    The payroll withholdings refer to the unemployment taxes and the income tax. Form W 4 of the employee determines the amount which the employer needs to withhold income tax. The unemployment tax and the income tax vary based on the work location of the employee. The payroll deductions for taxes could include income tax, local tax etc. the labour laws also determine the tax rate for unemployment as well.
  • Benefits deductions:
    The benefits deductions could be the contribution towards health insurance, life insurance and various fringe benefits. These benefits unlike others, incur a cost from the employee for the coverage and the service.

Traditionally, the employee and the employer pay a certain amount towards the monthly health insurance premiums. The retirement plans more often deduct a percentage sum from the income of the employee and place it under the retirement account on behalf of the employee.

Payroll can be processed manually by your in-house team, or you could outsource your payroll activities to a third party company. The best way to calculate and manage the payroll of your employees is to use appropriate payroll software.

Deciding the payroll could be time-consuming and complicated, which also makes the process of payroll deductions more complex. Irrespective of how employers want to run the payroll, a proper understanding of the basics of payroll can help to track the finances of the business and create a better plan for payroll deductions. Even though expenses on labour could be the biggest expense of any business, running the payroll and the payroll deductions correctly is crucial for the long term growth and expansion of the business.

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