reparing a sturdy and reliable payroll policy is an essential requirement for all businesses. After all, payroll and benefits are two of the largest expenses that business owners should take into account. By having a solid payroll process and structure in order, you’ll know that a crucial part of your business finances will run steadily. You need proper steps and actions to create a sound payroll policy.

Many small business owners start out processing payroll on their own or hire a payroll service agency to help manage the payroll for them. The payroll agency will have a team of accountants or tax preparers to calculate deductions. But payroll is more than just cutting checks. It goes deeper than that.

What is payroll and what components are included in the process?

Payroll is a term used by a number of organizations in relation to paying your employees their salary, benefits and compensations and payroll-related taxes to federal and state agencies. Payroll can also refer to a company, department or piece of software that is used to process employees’ salary and wages and calculating taxes.

Payroll can also mean a few other things:

  1. Payroll refers to the employees you pay, together with their information
  2. Payroll is also the amount you pay the employees during each pay cycle
  3. Payroll can be described as a process of calculating taxes, bonuses and distributing salaries/wages to the employees.


Managing payroll is an important responsibility for any business if you’re not working with independent contractors. It requires an understanding of current regulations and detailed tax proficiency to ensure correct withholding and filing, and a highly organized system that can be counted on to pay the employees the exact amount of money owed.

For some organizations, using payroll systems or outsourcing payroll can assist in reducing stress and costs and can be more time effective.

Parts of payroll

1. Employee Information

Before you start running payroll, you need to gather some information from your employees. Every employee must fill out the form W-4. This form will supply you with data about the employee’s federal income tax withholding exemptions together with their personal details like their name, Social Security number and home address. You need this information to accordingly run and distribute payroll. Every new employee will need to fill out a Form W-4.

2. Calculate Total Working Hours

If you hire hourly employees, you have to keep track of the total hours they've worked. This is to make sure you pay your employees the correct amount. If you have salaried employees, you may have to ensure they are sticking to the working hours they are allocated. You have to keep a record of their paid time off and holidays that your employees take.

The standard number of working hours for full-time employment is 40 hours a week. However many employers consider their employees as full-time when they do 35 or 37 hours in a week.

3. Understand The Difference Between Salaries and Wages

A salary is a fixed amount of money or compensation that you give your employees. For example, a salaried employee might receive $70,000 as a yearly salary and often the salaries are paid semi-monthly. One pay date might be on the 15th of each month, and the other pay period will be on the last day of the month.

A wage is what you pay the employees that are paid for the hours they have worked. You’ll set a certain rate of pay for each of your waged employees. To calculate your employee's total wages, you’ll have to multiply the rate of pay by the number of hours the employee works. For example, if you’re paying an employee $10 per hour and the employee works 20 hours per week, you owe the employee $200 before deductions.

4. Pay Your Employees Overtime

All non-exempt employees including both non-exempt hourly and salaried workers should receive overtime pay. Overtime hours usually begin after an employee performs their duties for more than 40 hours in a week. Overtime pay is calculated based on one-and-a-half times the normal rate pay.

5. Fringe benefits

Fringe benefits are a form of compensation. Benefits include health insurance, education assistance, employee discounts and retirement plans. Any benefits you offer the employee should be taken into account in the payroll and some benefits are taxable.


A deduction is an amount of money that you deduct from your employee’s total wages.

1. Payroll Taxes

You’ll have to deduct payroll taxes from your employee’s salary. The total you withhold will depend on the employee’s total income and how many withholding allowances they can claim. Payroll taxes include federal income tax, state income taxes, federal employment tax, local income tax, state employment tax, Social Security tax and Medicare tax.

Companies are responsible for paying the employer tax too. Employers are responsible for reporting their payroll tax obligations and paying the required amount.

2. Net and gross pay

Every employer must show the employee’s net and gross pay on a pay stub. Gross pay refers to an employee’s grand total. Before you calculate payroll you need to know your employees’ gross pay. Some government agencies like the IRS also usually demand details regarding employees’ gross pay.

Net pay, on the other hand, refers to employees’ pay after all the deductions. It’s an employee’s take home pay.

Payroll Set up Tips

  • Evaluate your payroll needs. Begin by outlining your business's specific needs. Gather and organize all information in order to manage and process your payroll. Keep all the tax paperwork and files on your employees such as W4 and I-9 confidential.
  • Decide on the payment method. Would your employees prefer a direct deposit or paper checks? Pay attention to your employee payment preference.
  • Decide whether you are paying your employees a salary or wages and understand the rules for whichever you pick.
  • Decide who will administer your company’s payroll and handle the accounts. One of the most effective and cost effective ways to manage payroll is invest in good payroll software.
January 22, 2020
Company Culture & Management