Payroll management is the practice of managing and monitoring the compensation that employees get for the service performed. Payroll includes salaries, bonuses, deductions, and any other relevant financial activities, and is a big part of a company’s workforce management. Having accurate and effective payroll management is critical for a positive employee experience.
Main Processes & Must Haves
To ensure precise payroll management, you need to have a well-functioning payroll system in place. Without accurate payroll management, your company can face legal action and penalties. To avoid facing these consequences, most companies choose to outsource payroll practices, with outsourced payroll growing each year.
54 percent of organizations reported a primarily outsourced or hybrid delivery model, compared to 28 percent in 2016.IGS in 2020
Payroll solutions should include the main processes of payroll such as employee information, pay, and deductions (taxes) as they are vital parts for a company’s payroll processing to be functioning properly.
It is necessary to have a payroll policy to help handle payroll processes such as meeting payroll deadlines, complying with payroll laws, and protecting the company against lawsuits. The policy should be clear and concise to help your employees understand your complete payroll practices. Items to include in your payroll policy are:
- The workweek
- Breaks and meal periods
- Pay periods and dates
- Final pay checks
Having accurate employee information is an important part of payroll management as this is directly linked to compensation and taxes. Employee information that should be included is such as name, residential address, social security number, and more.
The employee information should be gathered during the onboarding process of an employee, if not before. When processing payroll for new hires, there is certain information that needs to be collected and documents that need to be filled out. For example, all new hires need to fill out the W-4 form. It is also a good idea to check for accuracy in a new employee’s timecard information and see if the individual is categorized as non-exempt.
As many employees highly value their wages and pay, compensation management is a big part of payroll management. This means correctly calculating each employee’s gross income and net pay each pay period and making the appropriate deductions. If an employee does not get salaried correctly, it will reflect bad light on the professionalism of your business and can lead to internal disputes.
It is the responsibility of each HR department and company executives to have a structured compensation plan to show what employees can expect from on their paycheck each pay period. When creating a compensation plan, several factors should be taken into consideration such as company size, financial situation, industry, and objectives.
Deduction and Tax
Tax filings are another big component of payroll management. To ensure that companies follow tax compliance and avoid tax penalties, most HR teams have outsourced payroll tax. A payroll service provider ensures you accurate tax calculations and tax payments.
There are many taxes and deductions associated with corporate business, such as income tax, local tax, state tax, and federal taxes. The tax rates will differ depending on where your business and employees are located. There are also different aspects of the tax payment associated with employee payroll, such as pretax and after-tax.
Pretax deductions are withdrawn from employee wages before taxes are carried out. After-tax deductions are initiated when the deductions do not qualify as pretax. We have an in-depth article on the differences between pretax and after-tax if you want to learn more about it.
Common Difficulties and Ways to Identify Them
As you might have understood by now, payroll management is a complex practice with many important components to it. What your processes will depend on many things, such as what type of employees you have. For example, there are different laws for international employees than for US residents. There are also explicit guidelines to follow if you have service employees, such as tip credit.
It is important that HR management have accurate payroll practices to avoid lawsuits or any other legal actions. Below, we will list common payroll mistakes and ways to identify them:
If you are using a manual timekeeping system where employee working hours are recorded by hand, the chances of inaccurate data are high. If your timekeeping system is not currently automated, consider implementing payroll software that tracks and computes the employee hours for you. Without cloud-based software, wrongful data can snowball into an incorrect paycheck, which is something all HR management departments want to avoid.
If you are expanding internationally and hiring an international workforce, you might be facing new challenges regarding your employee payroll. Factors to look out for when dealing with international payroll include:
- Employee pay by country
- Laws and regulations
- HR Expansion
Domestic Service Workers
Obligations regarding domestic service workers, also called household employees, differ since each state in the US has its own definition of household employment. Before hiring a full-service household employee, the first step should always be to confirm that the individual qualifies as a household employee. Once hired, you need to ensure that you are following compliance and labor law when doing payroll. Areas to be aware of when hiring and paying domestic service workers include:
- Minimum wage
- Overtime regulations
- Payroll taxes
Payroll Withholding Tax
The rules regarding payroll withholding tax can be difficult to grasp for a payroll department as they are very complex. Withholding tax is the amount employers withhold from employees’ wages and pay straight to the government, which comes with both advantages and disadvantages. The tax withholding amount is a credit against income taxes the employee shall pay during the year. There are different rules and tax laws regarding withholdings for US residents and non-residents. Below, we list the different types of withholding tax to be concerned about:
- Federal income tax
- Social security and medicare tax
- State income tax
- Local income tax
- Additional state-based withholding tax
Pay equity, the practice of equal and fair pay between employees despite race, gender, and other demographics, is a heated topic and should be closely monitored by the human resources department. When you manage payroll, make sure that you are complying with the Equal Pay Act, which rules that women and men should all be given equal pay for equal work in the same workplace. If you have pay equity issues, consider taking these steps to improve your workplace situation:
- Increase visibility on the employee population
- Conduct pay equity assessments
- Implement transparent compensation practices
- Provide training for upper management
- Continuously monitor pay equity
If you have taken the steps mentioned above, but are still finding yourself struggling with pay equity issues, you should consider implementing pay transparency at your workplace. Pay transparency refers to an open and communicative approach when it comes to discussing salaries within the company. It is still a relatively new trend within the HR world, but has been proven to be useful to prevent pay discrimination and pay gaps. Other benefits associated with pay transparency include increased trust in the company, better physiological safety, and improved employee performance.
Some states such as New York, California and Oregon are starting to pass pay transparency laws in hopes of reducing pay inequity. These laws also include banning requests for salary history from candidates. As new regulations are starting to be passed at a state and local level, make sure to stay informed about your state’s pay transparency and laws at all times.
Audits and IRS wage levy
Sometimes you have already conducted the HR and payroll mistake. Then you might be awaiting an employee benefits security administration audit or you are receiving an IRS wage levy, a document meant to recover unpaid federal taxes. In order to prevent employee benefits security administration audits, make sure you are conducting frequent internal assessments and maintain structured and organized records that are easily accessible. You can also use the DOL’s self-compliance tool which includes programs that guide employers and teams through their payroll.
There are also certain steps you should follow if you have received an IRS wage levy:
- Verify the information
- Give the employee the statement of exceptions and filing status
- Inform your payroll provider or applicable third-party vendor
- Consult IRS Publication 1494
- Keep withholding the IRS wage levy until the full amount has been paid
- Avoid violating US Code Section 1697
What is a Payroll Management System?
By using payroll management software, your payroll processing can be automated which eliminates the risk of error. If mistakes happen to occur anyway, the system can scan incorrect numbers and alert HR managers. The management solutions can also alert managers or employees on important dates and deadlines. When you are looking for different options for payroll software, you can choose between an on-premises payroll system and a cloud-based payroll system, depending on company size and business needs.
What to Look for in a Management System
There are many advantages of using online payroll software. By handling your payroll electronically in software, you can carry out pay runs with greater efficiency, certainty, and speed.
According to Sapient in 2022, the top two major gaps reported in payroll applications are overall functionality and customization.
Are you one of many businesses that is growing and embracing digital transformation and want to switch payroll providers? In your search for online payroll services, look for a payroll management system that includes:
- Payroll calculations
- Pay slips
- Tax calculations
- Payroll and data reports
- Bonuses, vacation pay, and expenses management
- Possibility to connect other modules such as expenses and time and attendance
Benefits of Having Higher Control of Payroll Management
Do you have a well-functional running payroll, but you feel like something is still missing in your employee self-service? The reason behind your disorganization might not be your payroll system itself, but rather your HR system as a whole. Too many separate systems that do not communicate with one another, cause inadequacies such as multiple data re-entry and complex processes. PeopleSpheres is a unified platform that connects all your HR data and software on a single platform, reducing HR workload and inefficiencies. The platform allows you to have higher control of your payroll management by connecting all your HR practices in one place.