A Guide to Payroll Processing in The USA

Payroll management is the most expensive, but one of the most critical accounting activities. A timely and accurate payroll processing leads to happy employees, which increases their morale and future increase business productivity. Any discrepancies in payroll processing also affect the business’s current financial position. Businesses can use payroll outsourcing services to avoid such situations and reduce the in-house team’s workload. However, before making any decisions about managing the payroll, it is necessary to know the critical factors of the payroll process. Let us learn what payroll is and what factors affect its processing and management.

What is Payroll?

Payroll is the total amount a business is obliged to pay its employees for their services. It includes wages, salary, bonuses, deductions, and net pay. Based on the business’s payroll policy, a business can pay its employees weekly, bi-weekly, or monthly.

The payroll processing can be done manually, via accounting software, or with the help of payroll outsourcing services. Regular and accurate payroll management is compulsory to keep the employees motivated and business financials in sync. Payroll processing is done by following the laws and regulations set out by FSLA (the Fair Labor Standards Act).

There are some basic withholdings taken from the paycheck of every worker. The amount of deduction varies depending on income, the number of dependents, filing status, etc. In the USA, the payroll calculation takes into account some important elements, including:

1. Social Security
2. Medical Insurance
3. Federal Income Taxes
4. State Income Taxes

What is a Typical Payroll Cycle?

The most common payroll cycle includes weekly, bi-weekly, and monthly payments; however, the typical payroll cycle in the USA is bi-weekly. It is dependent on state laws and regulations, business requirements, industry, and types of workers.

Payroll Scheduling

A payroll schedule refers to determining the length of an employee’s pay period and how often the payment is made. Though there are some minimum standards, it is a matter of preference per the business and employee requirements. Every state has its regulations regarding pay frequency; however, most states require at least semi-monthly payments for every business employee. If state regulations do not bind the business, it can choose any pay period that best suits the business and its personnel. A business must consider the costs while deciding on a pay period and frequency, as the higher the pay frequency, the higher the payroll processing cost. Payroll processing outsourcing services help businesses in choosing the proper payroll schedule.

Documents Required for Payroll Processing

Before starting the payroll process, a business needs to collect some documents. These documents are submitted to the relevant government authorities and kept by the business as proof of payment to prepare financial statements. Payroll outsourcing services providers help businesses collect, compile, and submit all the necessary documents as and when required. The important documents required for payroll processing include:

1. Employee’s withholding certificate (Form W-4)
2. Request for taxpayer identification number and certification (Form W-9)
3. Employment eligibility verification (Form I-9)
4. Job application
5. Bank details
6. Medical insurance forms
7. Retirement plan documents

What Taxes Are Involved in Payroll?

Payroll taxes deducted from every employee’s paycheck are levied to finance several benefits, including social security, medical insurance, and unemployment insurance. The payroll taxes are levied as per the regulations set up by the government authorities, i.e., FLSA, FICA, and FUTA. The taxes involved in payroll include:

1. Social Security Tax-

Also known as OASDI (Old age, Survivors, and Disability Insurance), is a benefit that helps the disabled and elderly workers, their spouses, and surviving dependents or spouses. An employer is required to contribute 6.2% of the employee’s wages. The employer and employee both contribute the same percentage to complete the 12.4% of the OASDI fund.

2. Medicare-

Medicare of Health Insurance (HI) covers health care services and inpatient hospital visits for the elderly and others who need help with treatment for specified health issues. The employer and employee have to contribute 1.45% of the employee’s wages for the HI.

3. Federal Unemployment Tax-

Unemployment tax is imposed by FUTA and is paid by the employer based on the wages it pays to its employees. Employers have to pay this tax from their side and cannot withhold it from the employees’ paychecks. The federal unemployment tax rate is 6% for the first $7000.

What Are The Critical Payroll Regulations?

The legal aspects of the payroll processing are managed by the IRS (Internal Revenue Services) and DOL (Department of Labor). Every business must comply with the laws and regulations set up by these regulatory authorities to ensure accounting accuracy and avoid penalties. Some of the important payroll regulations are:

1. FLSA-

The Fair Labor Standards Act (FLSA) entitles a nonexempt employee to a minimum wage of $7.25 per hour and overtime pay of 1.5 times the regular pay for work done after 40 hours a week. It also requires the businesses to maintain a record of every nonexempt employee. Keeping track of every employee and recording their details requires time and resources. To calculate accurate pay and overtime, a business needs to diligently track the attendance and time spent by every employee on the work. Businesses can use payroll outsourcing services for this activity and reduce the burden on the full-time business employee to increase their productivity.

2. FICA-

Federal Insurance Contributions Act (FICA) manages the two deductions made from an employee’s paycheck, i.e., Social security tax and Medicare tax. The total FICA tax should be 15.3%, a combination of social security tax and Medicare.

3. FUTA-

Federal Unemployment Tax Act (FUTA) requires employers to contribute to state and federal unemployment programs to compensate the employees who have lost their jobs. The tax paid under FUTA is not a deduction from employees’ paycheck; the employer directly pays it. However, if the employer has agricultural or household workers, the FUTA tax is an exemption.

Following all the necessary regulations, accurate tax deductions, compiling and submitting all important documents, and calculating correct pay and overpay – all form the rough framework of payroll processing. Payroll processing is a complicated task and requires complete attention to detail and knowledge about the regulations. If the business gets in-house personnel to manage the payroll processing, they might get overburdened with work. Businesses benefit from outsourcing such complex activities, which helps them save time and resources. Payroll outsourcing service providers are solely focused on the payroll processing function. They have expert and experienced staff with up-to-date knowledge of relevant regulations and taxes. They ensure smooth payroll processing and leave businesses with extra time and resources for core activities.