Objectives of a Payroll System
Whether you use a manual, in-house computerized or outsourced payroll system, the main objective is to compensate employees for services rendered. The system should also meet your payroll tax obligations. Within these objectives, a number of tasks must be executed. Payroll-processing duties vary by employer. Still, some general rules apply.
The U.S. Department of Labor, which administrates federal labor laws, requires employers to establish a timekeeping system. You may have a timekeeper monitor employees’ hours, require that employees use a time clock, or have employees record their own work hours. Because a manual payroll system is done completely by hand, it might prove inefficient for timekeeping; an automated timekeeping system might be better. If you cannot afford an electronic timekeeping system, at the very least, implement a standard punch clock that employees may punch with time cards.
Employers are required to establish regular paydays and compensate employees accordingly. Most states have payday laws that say when employees should be paid by. Your payroll system should enable accurate wage and deduction computation. The process includes setting up new hires in the system; updating employees’ payroll records; calculating regular and overtime wages, salaries and additional pay such as bonuses, commissions and retroactive pay; and deducting payroll taxes and voluntary deductions such as health insurance and retirement contributions. The system should have a report-printing feature that allows you to review, and if necessary, modify the payroll before printing paychecks and pay stubs.
Direct Deposit/Check Printing
Direct deposit is possible only via payroll software or if you outsource your payroll duties to a payroll service provider; it’s not possible through manual processing. If you choose to offer direct deposit, the goal is to deposit employees’ wages and salaries into their designated bank accounts by payday. You send the direct deposit file to the bank after calculating wages and deductions. After confirming with the bank that the file is appropriately received, you generate and print paychecks and pay stubs. If the payroll system is manual, you may handwrite paychecks.
The U.S. Department of Labor and some states require that employers maintain payroll records for all employees. Recordkeeping criteria for nonexempt, or hourly-paid, employees include daily work hours, total weekly hours, hourly pay rate, additions to or deductions from wages, daily or weekly regular pay, and weekly overtime wages. Because exempt employees are normally salaried, you don’t have to record hours worked for them. However, you must record the basis upon which they’re paid, such as $650 per week. Payroll software stores payroll records. A manual system requires that you file hard copies of payroll records.
Regardless of the system used, you must pay and report payroll taxes to the appropriate administering agencies. This includes reporting tax liabilities to the Internal Revenue Service quarterly or annually, and performing annual W-2 reporting with the Social Security Administration. State governments have their own requirements for state employment taxes; some local governments have this requirement for local taxes. Payroll software enables tax reporting. If you outsource your payroll duties, the provider offers payroll tax services.