Payroll adjustments must be timely and accurate for 2 main reasons:

• To ensure that employees receive the correct pay.
• To stay in compliance with employment laws and regulations requiring employers to keep accurate payroll records.

Here’s an overview of the different types of payroll adjustments, when they’re necessary, and the steps for making those adjustments.

What is payroll adjustment?

A payroll adjustment reflects any changes to employee compensation, as well as corrections to oversights resulting from tech or human error. The appropriate changes must be made to the amount paid in the employee’s paycheck or deposit and also to the payroll records.

Pay adjustments can be for one-time events, such as special bonuses, or they can be for longer-term changes, such as raises that accompany promotions or annual cost-of-living increases. The types of payroll adjustments that an employer or HR department may have to manage can vary.

Types of payroll adjustments

Some of the most common types of pay-increase adjustments include:

• Raises and promotions. All increases in an employee’s regular pay must be accounted for.
• Cost-of-living increases. These periodic (usually annual) increases typically affect many or all employees at the same time. Their pay and records must all be changed accordingly.
• Bonuses, incentives, and commissions. These are types of variable compensation that must be added to the employee’s total pay for the appropriate pay period.
• Overtime pay. It’s especially important that overtime wages be paid correctly to comply with federal, state, and local regulations.

Other typical adjustments involve:

• Demotions or other pay cuts. When an employee’s pay is cut due to performance issues, changes in work shift or hours, or for other reasons, you’ll need to make a pay adjustment.
• Deductions and withholding taxes. Any changes in the amounts that employees contribute to their benefits package or that are withheld from their pay for taxes must be adjusted correctly.
• Sick leave and vacation time. Both paid and unpaid time off should be accounted for in payroll records.
• Employees leaving. Federal and state regulations require that certain types of payments be included in an employee’s final paycheck.
• Correcting errors. Adjustments are necessary if employees received the wrong pay in a prior paycheck or no pay at all.

When and why are payroll adjustments necessary?

It’s essential that employee pay and payroll records remain accurate and up to date. Any mistakes in how much employees are paid, even if quickly corrected, can lower employee morale. Furthermore, many federal, state, and local government agencies require employers to keep accurate and complete records and maintain them for years. These records may be crucial for paying taxes, showing compliance with employment law, and defending against wage-and-hour claims made by employees or former employees.

The HR department should expect frequent changes in employee compensation and be prepared to make prompt payroll adjustments.

Factors that can affect payroll adjustment

A variety of circumstances can create the need for a pay or salary adjustment. Some are routine, and others are one-time events. These factors can be internal to the company, as in promotions, salary increase, or the need to reduce wages to prevent layoffs. Or they can be due to external forces, such as changes in tax rates. For example:

• Changes in government regulations. You’ll need to make payroll adjustments for any changes in laws concerning local and/or federal minimum wage, how employees are classified as exempt or nonexempt, when overtime must be paid, and how workers are classified as employees vs. independent contractors.
• Changes in wages, salaries, and pay rate. Every salary and/or wage adjustment requires employee pay adjustments. These can involve increases and decreases due to promotions, demotions, job changes, merit raises, annual raises, or anything else that affects employee pay.
• Changes in employee classification. Adjustments are needed when an employee moves from a nonexempt job to one that is exempt or vice-versa.
• Changes in employee benefits. Compensation adjustment is needed when employees choose different benefits, such as changing their health care plans. This also applies when employers change the benefits they offer, or when the benefit providers change their costs.
• Changes in tax laws. When tax rates change, payroll adjustments must be made promptly.

How to make a payroll adjustment

Making payroll adjustments requires several steps, all of which should be done with 100% accuracy. Unfortunately, it’s easy to make calculation mistakes if you run payroll manually. Using a payroll software or service provider can help you avoid these types of errors. In addition, having set procedures in place for making payroll adjustments can prevent you from overlooking anything.

Either way, steps include:

• Notifying employees in advance and communicating with them about any payroll changes.
• Updating employee records, including pay stubs and the employer’s paper or digital records.
• Calculating the adjusted pay.
• Informing your payroll service providers.
• Checking for errors and inconsistencies.
• Ensuring compliance with applicable laws and regulations, including overtime rules and the correct classification of exempt and nonexempt employees.

Payroll changes can occur frequently in any organization. The HR department can contribute significantly to the smooth operation of the company by ensuring procedures are followed to make adjustments quickly and accurately.

For ongoing news, tips, tools, and resources surrounding HR and business management, return to Workest daily.

1 BLS Employment Cost Index, March 2023

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Required Payroll Documentation:

Third Party Access /POA Needed:

Local Income Taxes Imposed:  

State Resources:

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If you’re having issues with your current payroll company, you’re not alone. An estimated 85% of organizations have problems with their payroll technologies, and 69% have issues with their payroll data.¹ Finding a new provider may be your best business decision. And when it’s time to switch payroll administration, you’ll need to do it right to avoid disruptions and adverse consequences.

To increase your chance of an ideal outcome, follow this 10-step process for switching payroll providers.

Determine your company’s needs

If you’re taking the time to switch providers, give considerable thought to what the “ideal” payroll company looks like. Do you need a comprehensive payroll processing solution, or a more scaled-back offering? Factor in what you aren’t getting from your current payroll service but would like to accomplish in changing payroll companies.

Set a timeline

Don’t charge ahead with a new payroll service at the earliest opportunity. Figure out the best time to switch companies. Try not to change payroll providers during your organization’s busy seasons or amid other large, disruptive initiatives or changes.

Review your contract

Know what you agreed to with your current payroll provider. Find out how far in advance you must give notice that you’re leaving and if your company will be on the hook for any cancellation fees. Factor this information into your strategy and timeline.

Vet and choose a new payroll provider

Take time to find a new payroll company that fits the needs you’ve established. Research multiple payroll providers and create a shortlist of the best options. From there, base your choice on how the different payroll companies measure up regarding:

• The scope of their product and service offering.
• How responsive they are in explaining their products and answering your questions now. And the amount and quality of ongoing support that you can expect after the contract’s signed.
• The level of experience they possess with companies similar to yours.
• Whether their tech stack integrates seamlessly with yours.
• What the references they provide say about their experience. (Always get references.)
• If their cost for payroll services suits your company’s budget.

Give your old provider notice

Once you’ve made your selection, send your current provider notice that you’ve decided to switch payroll providers. Include the date of cancelation in the communication, and keep a record of all related correspondence.

Set a change-over date

Talk with the employees involved with payroll along with the new payroll provider and set a date to change to the new system. Keep communications open to preempt obstacles that could hold up the process.

Collect and share your payroll data

You’ll need to share detailed payroll information with your new provider. Be prepared to provide such company information as:

• Company name and address.
• The company’s federal employer identification number (EIN).
• State and local tax identification numbers and the unemployment insurance number.
• Payroll schedule.
• Copies of required historical payroll data and previous tax forms.
• Documents authorizing the new payroll company to perform services on your company’s behalf. These will be components of the payroll solution you agreed to in your contract. They may include writing payroll checks and handling tax filings.

You’ll also need to share employee information with them. For example:

• Salaries, hourly wages, and payroll histories.
• Employee data, including names, addresses, Social Security numbers, and dates of birth.
• Employee bank account numbers and routing numbers for direct deposits.

Notify employees of the change

Blast a new payroll system announcement throughout the organization. Share that the company is switching payroll services and say a few positive things about the new provider. Do this well in advance of the change date. Send out at least 1 reminder a few days prior, as well. Giving employees plenty of notice allows them to download or request copies of any documentation they want to keep from the previous provider.

Execute the change

Sign the contract and move forward with the payroll provider transition. Be ready to answer questions and give additional information to the new provider. Once the new system goes live, work with IT to ensure the old payroll provider no longer has any access.

Keep a close eye on the new process

Devote extra attention to the payroll processes during the first few pay periods to help create a smooth transition. Address any technology glitches or errors immediately, so they don’t become bigger problems. Direct that any necessary payroll adjustments be made immediately.

If you’re experiencing problems with your current payroll company, it may be time to look at other providers. It might seem like a daunting task with all its moving parts. But changing payroll providers can increase efficiency and reduce payroll errors in the long run.

Business has its challenges. We have solutions. Find ongoing news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

1 Future of Payroll Survey, Ceridian

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Payroll is an integral part of the functionality of a business because it is how employees are paid for their work. It’s crucial for business owners and employees alike to clearly understand their payroll system to ensure proper execution, especially in a small business. Payroll errors can frustrate employees and cause financial stress. Staying on top of payroll management and proactively answering employee’s payroll questions can go a long way toward cultivating company culture and loyalty.

This list of frequently asked payroll questions and answers is designed to prevent confusion, make managing payroll easier, and put employers and employees at ease throughout the process.

What is included in my paycheck?

Your paycheck will present your net pay, otherwise known as take-home pay, for the relevant pay period.

Net pay is based upon gross pay (the employee’s wages earned before deductions), minus any deductions for paying taxes. Those include federal income tax, state and local taxes if applicable, and Social Security and Medicare (FICA). Other deductions may apply as well, such as health insurance, life insurance, or 401(k) contributions. The paycheck stub lists employee wages and deductions for the employee’s reference.

How is my pay calculated?

Depending on whether you are a salaried employee or hourly, your paycheck will either be a set amount or determined based on the number of hours you worked during the pay period.

A paycheck calculator can be helpful in determining net pay and to calculate payroll taxes.

What is the difference between exempt and nonexempt employees, and which one am I?

Exempt employees are exempt from Fair Labor Standards Act (FLSA) regulations and are not eligible for overtime pay. Typically exempt employees are salaried and perform more administrative or executive duties.

Nonexempt employees are typically paid hourly, usually for manual or technical job duties. They are covered by FLSA regulations and are eligible for overtime pay. If you are a nonexempt employee, this means you must earn at least the federal minimum wage per hour.

All employees covered by the FLSA must receive overtime pay for all hours worked in excess of 40 in a workweek. This is typically paid at 1.5 times the employee’s regular hourly rate.

What taxes and deductions are being taken out?

Because businesses are subject to federal, state, and local taxes, employers withhold taxes. These deductions include payroll taxes and income tax withholding.

Payroll deductions are determined when employees complete their tax forms upon hiring.

Can I change my withholding amount?

Payroll deductions may be modified with an official payroll adjustment by the employer. To accomplish this, employees must complete a new Internal Revenue Service (IRS) Form W-4 and submit it to the employer.

How often will I be paid?

Most companies run payroll weekly, bi-monthly, semi-monthly or monthly. Employees are most often paid via direct deposit into a bank account or with a physical check. The employee’s bank’s processing speed may impact which day the money becomes accessible.

What about time off and holiday pay?

The FLSA does not require employers to pay employees for time they have not worked, including vacations or holidays. Still, your employer may offer paid time off that was agreed upon at the time of hire. Many employers also offer holiday pay or other supplemental pay as specified in employee contracts.

How can I access my pay stubs?

If you are paid through direct deposit, you will likely have access to digital pay stubs through your company’s online payroll software system. Payroll software programs allow for easy access to digital pay stubs and simplified payroll processing.

If you are paid with a physical check, your pay stub will be attached.

What benefits are offered and how are they taxed?

Employers may offer benefits like health insurance, which are taxed accordingly when they process payroll.

In addition, an employer may provide fringe benefits, like the use of a company vehicle. These benefits may also be subject to income tax withholding and employment taxes based on the fair market value of that item.

What about benefits like workers’ compensation and other health plans?

If you become ill or injured on the job, you may be eligible for workers’ compensation benefits to cover the cost of medical care and lost wages. Contact your state’s workers’ compensation board for more information.

If an employer pays for a health insurance plan for employees, these payments are not subject to Social Security, Medicare taxes, or federal income tax withholding because they are not wages. This exclusion also applies to qualified long-term care insurance contracts.

However, the cost of health insurance benefits must be included in the wages of S-corporation employees who own more than 2% of the corporation, and taxed as such.

What is my company’s EIN, and where do I find it?

An EIN is a federal employer identification number required for a company to pay taxes to the federal government. A business must apply for and receive this number through the IRS to fulfill their tax obligations.

What tax changes should I be aware of for 2023?

According to the Social Security Administration

• The Social Security tax wage base for employees increased to $160,200.
• For wages below $160,200, the tax rate is still 6.2%.
• Medicare tax also applies to all wages at 1.45% for employees and employers.

Employment taxes are the responsibility of the employer, who is obligated to report all wages and other compensation paid.

For small business owners, the payroll process doesn’t have to be complicated. By taking a proactive approach toward common payroll questions and concerns, employee payroll can run smoothly and seamlessly. Furthermore, improving the payroll process can improve employee satisfaction.

Business has its challenges. We have solutions. Find ongoing news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

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What is National Payroll Week?

The inaugural National Payroll Week kicked off in 1996 to recognize and honor the many cultural, social, and economic achievements of America’s employees. It goes a step further, highlighting all week the importance of relationships between employees, payroll professionals, and the various government agencies and programs supported by the payroll industry’s collections of tax withholdings. In fact, payroll and income taxes typically fund a large percentage of a state or federal treasury’s annual revenue.

Who celebrates National Payroll Week?

National Payroll Week can be celebrated by any company. It’s a time to honor all the hard work your payroll team performs when it comes to getting employee paychecks out correctly and on time. Ideally, the entire workforce gains a better understanding of what’s involved in processing the paychecks they look forward to on payday. It’s an opportunity to learn more about the payroll withholding system, your payroll team, and the inner workings of your payroll department.

Ideas for celebrating National Payroll Week

If you haven’t celebrated National Payroll Week in the past, this is the year to do it. Let’s take a look at some simple ways you can bring paycheck and payroll awareness to your employees.

1. Become an NPW supporter

The American Payroll Association makes it easy to sign up to be a supporter of NPW. All you have to do is spread the word about NPW throughout your company and sign up to be a supporter. In return, the American Payroll Association will provide a corporate link to your business via NPW and additional free publicity opportunities.

2. Decorate with NPW swag and hand out gifts

Decorate your office with some NPW swag. The National Payroll Week website has a store where you can purchase themed balloons, pens, T-shirts, and employee gifts.

3. Host a celebration to honor your payroll department and employees

Once you’ve decorated to raise the curiosity and interest surrounding NPW, host a celebration to honor your payroll department. You could provide drinks, food, and educational materials. You may also want to honor your top payroll team performers and tell everyone about their accomplishments for the year.

4. Educate your employees

Many employees don’t fully understand their paychecks and benefits and compensation packages. You can share useful information pertaining to employee pay, benefits, and how to qualify and use those benefits.

5. Schedule a casual lunch and learn

Arrange an extended lunch break during which 1 or more of your payroll staff presents to their coworkers the inside scoop on payroll and benefits. They can field payroll questions and share in-depth insights that other employees might not have thought to ask about. This is a great way to get important conversations started and bring your associates from different departments closer together.

6. Partner with other local companies

Use National Payroll Week as an opportunity to partner with other companies in your local area. There’s a good chance that you’re not the only business celebrating NPW in your town. Take the time to get to know your industrious neighbors. Take turns visiting each others’ places of employment and sharing knowledge while explaining your business.

7. Plan and host a community event

Consider hosting and planning a community event for National Payroll Week. You could partner with local restaurants to provide the food and organize various payroll-themed games. Perhaps hold a contest in which employees win prizes. This could provide another great opportunity to invite speakers to share expertise.

8. Encourage discussions around payroll and benefits

Encourage your employees to talk about payroll and benefits. Pay and benefits transparency is becoming a popular topic on all organizational levels. Perhaps your payroll team can brainstorm new benefits and present them to the workforce or upper management. To add a layer of excitement, this could be framed as a contest by which those whose ideas are chosen to be implemented receive recognition and a reward.

9. Take photos and showcase your dedication to payroll and employees

Document and post about your company’s NPW events to showcase your dedication to your payroll administrators and workforce as a whole.

National Payroll Week can help your company improve its culture, use of benefits, and understanding about how their paychecks are calculated and processed. It can also help your business further engage within your local community.

Business has its challenges. We have solutions. Find ongoing news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

1 National Payroll Week – Working for America

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Whether payroll records are generated in-house or through a third-party payroll provider, records must be properly created and safely stored. Failing to keep payroll records correctly can subject an employer to federal and state penalties and fines.

This article will discuss the types of records you are required to keep and the benefits of keeping accurate records. It will also provide an overview of the legal requirements concerning payroll records and some best practices.

What are payroll records?

Payroll records are all the documents used to keep track of employee compensation. A payroll record should include pay rates, pay period dates, total compensation including bonuses, gross pay, and tax deductions.

Maintaining accurate payroll records is crucial to ensure that:

• Employees are paid the correct amount.
• Your company is compliant with federal, state, and local laws that require employers to keep and maintain accurate payroll records.
• Your company has proof that it is reporting and paying payroll taxes correctly and complying with wage and hour laws.

What types of payroll records and information must be kept?

Figuring out how long to keep employee payroll records can be complicated. Federal, state, and local agencies may have different requirements. Some types of payroll documents need to be kept longer than others. Here’s an overview of different types of payroll records:

Employee personal information

Personnel records should include full legal name, Social Security number, address, date of birth, sex, occupation, and emergency contact information. These employee documents should be kept for 3 years to meet the requirements of the Fair Labor Standards Act (FLSA). Other items might include:

• Offer letters and payment agreements.
• Exemption status.
• Direct deposit authorizations.
• Benefit and stock purchase plans.
• Job evaluations.
• Purchase records and expense reimbursement receipts.

Time and attendance records

FLSA requires that for nonexempt employees, records are kept of when their workweek begins, hours worked per day, overtime earnings, and the total hours worked per workweek. These should be kept for 3 years. Timecards and other records used to calculate wages need only be kept for 2 years.

Wage and salary information

For nonexempt employees, keep records of their regular hourly pay rate, total regular pay, and total overtime pay. Keep for 3 years.

Payroll tax withholding information

You should keep records of all taxes deducted from employees’ paychecks. These include federal, state, and local income tax and FICA (Social Security and Medicare). The IRS requires organizations to keep payroll tax records for at least 4 years.

Leave information

Detailed records regarding paid and unpaid employee leave should also be kept. That includes personal time off, vacation and sick leave, and Family and Medical Leave Act (FMLA)-related time.

Other payroll deductions

Also keep records of other amounts deducted from employee paychecks, such as their contributions to pensions and other qualifying funds.

Remember that local and state government agencies may have longer requirements for retaining payroll records. To play it safe, you may want to keep records longer than required, perhaps for the life of your company.

Benefits of accurate payroll records

Maintaining accurate payroll records will help ensure that your business runs smoothly and avoids problems in the future. Benefits include:

• Proper employee compensation.
• Compliance with federal, state, and local labor laws.
• Accurate financial reporting.
• Proof that you are paying employees correctly.
• Accurate data to manage labor expenses.
• For employees, these records provide proof of employment.

Legal requirements for payroll records

Different federal, state, and local government agencies have payroll recordkeeping requirements for employers. These include the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC), and the Department of Justice. Some retirement savings documents must be saved according to Employee Retirement Income Security Act (ERISA) regulations.

Failure to meet the legal requirements might subject your company to an audit by the IRS or local tax agency. Without proper records, your company won’t be able to defend itself. You could also lose a lawsuit if you don’t have accurate records to prove that you paid what you should.

Payroll recordkeeping best practices

You should maintain records in a way that keeps them secure, organized, and accessible. You may keep hard-copy or digital records or a combination. While smaller businesses may rely on hard copies, the use of payroll software is becoming more common. The advantages of digital records include reduced chance of loss or destruction, greater accuracy, and cost-saving automation of routine tasks.

• Keep hard-copy records in fire-safe filing cabinets or other storage containers.
• Store digital records on hard drives, on secure servers, or in the cloud.
• Conduct regular audits and reviews.
• Ensure that the records are kept confidential.

Storing and maintaining payroll records correctly is essential for the smooth functioning of your company. It prevents problems with the IRS, other government agencies, and employees making wage and hour claims. You must ensure compliance with all federal, state, and local laws and that all payroll records are accurate and complete. There are many details to keep track of, and businesses often use payroll services companies to ensure they maintain HR compliance.

For more helpful tips, tools, and resources for HR and business management, return to Workest daily.

1 EEOC – Recordkeeping 

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On the admin side, your business is responsible for keeping a close eye on its payroll information for a variety of reasons. And granted, just because payroll recordkeeping is important doesn’t mean it’s not a yawn-worthy, tedious pursuit. Enter: the payroll register.

Knowing what payroll registers are and how and why to use them can help you tame the payroll beast.

What is a payroll register?

A payroll register is an all-encompassing report of every employee’s payment details for a specific pay period. Some businesses use digital spreadsheets to create payroll registers, some work from a payroll register template, while others opt for payroll software.

What items are included on a payroll register?

A payroll register lists a range of information, from individual employee earnings to gross pay deductions and beyond. Here’s a look at the line items that build a good one:

Employee name

List the employee’s first and last name. If applicable, include middle name or initial.

Pay period

These will be the dates the pay covers. Depending on the employer, a payroll period may be weekly, bi-weekly, semi-monthly, or monthly.

Pay date

Payday!

Gross pay

An employee’s total pay before any taxes or other deductions are withheld.

Net pay

Also referred to as “take-home pay,” net pay is the amount each employee actually receives.

Employee’s pay rate

List the hourly wage or salary for each individual employee.

Regular hours worked

The number of normal hours an employee worked during the pay period.

Overtime hours worked

The number of hours each employee worked beyond their regular hours. Some may be eligible for overtime pay.

Payroll taxes

The payroll register report should also include Social Security, Medicare taxes, and unemployment insurance.

Deductions

Deductions typically include withholdings for income tax payments, health insurance and other employee-paid benefits, and any garnishments of employee wages.

Employer contributions

If the employer helped cover items like health insurance or retirement contributions, that amount should also be included in this payroll journal.

Using a payroll register

Staying on top of entries to a payroll register is critical for payroll administration and accounting and tax purposes. Without proper upkeep, it won’t be accurate or a complete piece of otherwise-valuable data.

Enter payroll details

It’s an organizational best practice to add all the payment details to payroll journals every pay period to keep them current.

Regularly reconcile payroll registers

Conducting regular audits of your payroll data can help you catch mistakes and ensure the accuracy of payroll records.

Benefits of a payroll register

Although it may seem like a thankless pursuit, significant benefits result from logging payroll data into a register.

Payroll registers support company budgeting

Using a payroll register makes it simple to calculate total payroll expenses. It also offers an easy way to determine how much payroll tax a company owes.

Payroll records help guide hiring plans

In addition, comprehensive payroll registers let employers and HR personnel better assess business activities over time.

Among other things, this big-picture perspective lets them quickly spot trends indicative of predictable busy and slow seasons. This vital payroll data can inform purchasing and hiring decisions to navigate and optimize anticipated business ebbs and flows. For instance, the company can order supplies, equipment, and merchandise in advance of their need. They can also prepare to hire extra people during some months, to avoid costly overtime pay and employee burnout, and cease hiring in others.

Aid in addressing employee discrepancies

Employees frequently have questions about their paycheck history, overtime, and deductions. Payroll registers can help you quickly address them. Easily review the pay period in question and succinctly answer their payroll questions. Accurate information on hand decreases the chances of a disgruntled employee thinking they were underpaid or subject to unjustified deductions.

Streamline the recordkeeping processes

From the admin side, a primary reason to use a payroll register is that it creates a single source of truth for the company’s payroll information. If it’s accurate and easy to refer to, it prevents employers from wasting time digging through files or trying to recreate information from months earlier.

In short, using payroll registers is just good business. So understanding how to use one is critical. With stringent maintenance, you support the payroll process while preempting missteps in budgeting, compliance, and employee compensation.

Business has its challenges. And we’re here to help. Find daily news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

1 2019 Pay Experience Report, Ceridian

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To many, the breakdown of deductions and withholding can be confusing, beginning with the differences surrounding payroll tax vs. income tax. Income tax is a levy by the government based on an employee’s wages. Payroll tax, however, is what the employer and the employee contribute to the Federal Insurance Contributions Act (FICA). These taxes fund Medicare and Social Security.

Although employees may use income and payroll tax interchangeably, those in payroll administration must understand the difference.

What is payroll tax?

Payroll taxes, also known as FICA taxes, are funds that support Social Security and Medicare. The tax, determined in part by the employee’s gross wages, is split between the employer and the employee. Employers base the FICA deduction on the employee’s adjusted gross pay and then match it for their contribution. Adjusted gross pay is the wage after pretax deductions, such as monies directed to a 401(k).

Social Security tax payment

On average, employees may pay 6.2% of their adjusted gross pay up to an annual limit for Social Security. The annual limit may change each year based on the average wage index.

Wage base limit

The wage base limit is the maximum wage amount subject to tax for a given year. It’s the point at which the employer can stop deducting Social Security tax. That number tends to rise incrementally each year. For example, in 2020, the wage base limit was $137,700. In 2021, it was $142,800.

The wage base limit only applies to Social Security tax deductions. There is no wage base limit for Medicare. If wages exceed a set annual amount, the employee must pay an additional .9% of their gross to support Medicare. The employer does not match that deduction.

The wage that triggers the additional tax is:

• $250,000 for married taxpayers who file together.
• $125,000 for married taxpayers who file separately.
• $200,000 for the single taxpayer.

This threshold may be subject to change, so employers should verify them at the start of each year.

Medicare tax payment

The payment for Medicare funding is 1.45% of the gross payroll. As with Social Security, employers will match the employee’s contribution.

All rates are subject to change and require verification.

What is income tax?

Payroll tax and income tax are similar but different. Income tax is a levy on businesses and individuals that funds programs at the federal and sometimes state and local levels. The deductions from an employee’s wages for personal income taxes depend on several factors. Those include the number of withholdings the employee claims on their W-4 form.

What is a W-4 form?

Payroll form W-4 is an Internal Revenue Service (IRS) document that new employees fill out to determine federal tax withholding. It informs employers how much of their adjusted gross pay to withhold for personal income taxes. Generally speaking, the more allowances they claim, the lower the employee’s income tax deduction. How much they pay through ongoing withholding will determine whether or not they receive a refund or owe money when they file tax returns for a given year.

Employees can fill out a new W-4 form if they want to increase or decrease their income tax deductions. Doing either will typically change the amount they owe at tax time. Employers should use the most recent W-4 form when calculating income tax deductions and will need to make an official payroll adjustment for changes.

Tax tables

Federal income tax withholdings are progressive, so they typically rise with higher salaries. The IRS issues its publication 15-T annually. This document provides tax tables that help employers determine income tax deductions.

The IRS bases its wage ranges on the tax tables on 3 factors:

• Pay frequency.
• Filing status.
• Withholding allowances.

Employers match the adjusted wages to the appropriate table and deduct the proper withholdings.

State income tax

For many employees, the need to pay income tax doesn’t end with federal income taxes. State and local income taxes may also apply. The methodology for calculating these differs based on location. For example, some states may follow the same progressive tax rate as the federal government. Others appoint a flat tax rate, which is the same tax rate for all, regardless of taxable income amount. And some states and locales don’t impose income tax at all.

Employers must know the laws in their city and state for payroll deductions.

Payroll tax vs. income tax: What’s the difference?

There are a number of apparent differences between these 2 payroll withholdings. They fund different programs. Income tax funds general government operations. Payroll FICA taxes are designated specifically for Social Security and Medicare.

Different methods for calculating each also apply. For the most part, FICA is a set percentage. Income tax on the federal level is progressive based on wages. That may differ on state and local levels.

Finally, FICA is a federal tax. Income taxes can exist at the federal, state, and local levels.

It’s important that employers understand the details surrounding both payroll and income taxes for tax compliance purposes. Errors in deductions can impact the employees’ cash flow and lead to penalties for the business.

Unemployment taxes

Unemployment tax is a payroll deduction applied in some states to fund unemployment insurance for covered workers. Typically only the employer pays into it, but some states require employees to contribute to state unemployment tax. Check the laws in your area to determine if this additional payroll deduction applies to you.

Business has its challenges. We have solutions. Find ongoing news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

The post Payroll Tax vs. Income Tax: Understanding the Similarities and Differences appeared first on Workest.

Hence, efficient payroll administration matters. Payroll administrators facilitate all elements of employee payroll. The ideal result? An accurate, seamless, trustworthy process that benefits the company and its workforce.

What is payroll administration?

As it pertains to overall business administration, payroll administration is part of a company’s payroll department. It’s the umbrella under which every action related to payroll falls.

In larger companies, the payroll administrator typically works closely with the Human Resources department. In smaller companies, the business owner may handle the payroll administration tasks.

What does payroll administration accomplish?

Payroll administrator responsibilities include building and overseeing all aspects of the payroll process. Here’s a look at some of their primary goals and initiatives.

Ensuring work hours are properly recorded

Essential tasks payroll administrators perform to ensure they are calculating payable hours include:

• Accurately tracking clock-ins and -outs.
• Noting sick and vacation time.
• Properly tracking and paying overtime, commission, bonuses, and additional payable hours.

Delivering accurate and timely employee pay

The above actions give payroll administrators the complete picture of when employees worked, for how long, and when they took off. It also provides them with how much money they earned. Tracking this data maximizes the ability for employees to be paid correctly.

Tracking tax withholdings and deductions

Accurately tracking pay and tax status, the amount withheld from every pay period, all payroll deductions (like health and life insurance payments), and other deductions is essential. Payroll administrators should also be available for answering employee questions on these topics, as they can be confusing.

Providing general record keeping

An efficient payroll administrator will be thorough and comprehensive. Detailed payroll records containing data about every related facet will prove helpful in numerous circumstances. Organizations can use it for planning and budgeting, at tax time, and during audits.

Why is payroll administration important to an organization?

Accuracy and efficiency surrounding the payroll experience helps drive employee satisfaction and keep a company in good fiscal and legal standing. Therefore, managing it well is a most vital business requirement.

Builds employee trust and satisfaction

Getting paid accurately and on time keeps employees happy and engaged. In addition, having a designated contact to answer questions about pay, benefits, and deductions may alleviate employee stress and confusion.

A well-functioning payroll system makes the experience feel effortless to the employee. Other conveniences, like electronic timekeeping systems and direct deposits, can add to their overall satisfaction.

Follows employment laws

Federal, state, and local laws govern how an organization is required to pay its employees. Making errors can open companies up to costly fines and penalties. Payroll administration mitigates the risk of expensive errors putting the company’s health at risk.

Aids in tax compliance

Organizations are also required to abide by the rules and deadlines regarding taxes set by the Internal Revenue Service. Payroll administrators follow these rules closely and use them to guide payroll processes. How to classify workers, how much payroll tax and income tax to withhold each pay period, and other important tax-related tasks become their responsibility.

What are the options for payroll administration?

Depending on the company size and employee bandwidth, decision-makers may choose to either keep payroll administration duties in-house or outsource them. Advantages and drawbacks exist with either choice.

In-house

Organizations may hire an employee who serves as their payroll administrator to keep the functions internal. Implementing payroll software can ease the burden of handling these tasks inside the company. The benefit of in-house administrators is that they, too, are employees. It may be easier for their coworkers to trust and build rapport with them. However, hiring an employee can be a costly prospect and may stretch a small company’s budget.

Outsource

Choosing an external company to handle payroll administration may be a smart choice for organizations not ready to increase their employee base. Professional payroll companies can offer an already-built, seamless process. The downside is that outsourcing payroll may be more expensive than employing in-house staff. Plus, sending personal data outside the company can make some business leaders leery of this option.

Employers and employees alike benefit from an accurate, reliable, and complete payroll system. Understanding payroll administration, its importance, and what it takes to run effectively is a first step toward building an efficient process.

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1 Cost and Risks Due to Payroll Errors study

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Companies must follow guidelines on which forms to use, when to use them, and what they must contain. Here’s the 4-1-1 on common payroll forms about which employers should be well versed.

What is a payroll form?

At its core, a payroll form is an information-gathering and storage tool. These forms help employers accomplish functions like knowing how much to pay employees and what payroll taxes to pay. They also function as a report that companies can send to the government, including the IRS.

Here we’ll cover details pertaining to several specific payroll forms as well as the basics that apply across the board.

What information does a payroll form include?

The information a form contains will be specific to its purpose. The most common details involve:

• The employee’s personal information, often including name, address, date of birth, and Social Security number.
• Withholding information, such as federal income, Social Security, and Medicare tax withheld.
• The employee’s pay. This information usually includes wages, bonuses, deferred compensation, and tips.

Why are payroll forms important?

Using certain payroll forms is required for legal and HR compliance. But they also help businesses keep track of expenses and information they will need to access again. Easy access is useful for preparing such items as an accounting or tax statement, responding to an audit, and more. For example:

They maximize payroll accuracy

Paying employees what you owe them is essential. Multiple payroll errors and delays in payment can cause frustration within the workforce and drive people to leave. Therefore, eliminating such issues can help reduce costly and unnecessary employee turnover.

In addition, an organized, transparent payroll process helps the company function efficiently and understand its cash flow more comprehensively.

Access to accurate information helps businesses at tax time

Staying ahead of federal income tax demands is a smart business move. Employers who keep tax forms updated throughout the fiscal and calendar year have the information required for tax return filing.

Correct payroll forms help companies avoid fines

Payroll form mismanagement isn’t just an operational issue; it can end up costing the company money. These fines can stem from:

• Failing to pay some part of all payroll taxes owed.
• Forgetting to submit Social Security or Medicare taxes.
• Not sending or submitting tax forms by the deadlines.
• Misclassifying workers.

Which payroll forms should companies use?

There’s a myriad of forms that may be required of an employer by the state, the IRS, and/or other regulatory bodies.

Direct deposit authorization form

This form is a non-tax payroll form. Employees complete it to permit employers to deposit their pay into an account of their choosing. This process replaces a paper check.

Time and attendance sheets

A physical or electronic time sheet allows employees to log the time spent at work during an applicable pay period. This form also helps Human Resources departments keep up with sick and vacation days. Time and attendance software can streamline how this information gets integrated with payroll processing.

Form W-4

Completed by the employee, W-4s determine for employers how much tax withholding to deduct from an employee’s pay.

Form W-2

This payroll form reports employee compensation (including health insurance) and withholding. By January 1 each year, employers must send each employee a copy of their W-2 pertaining to the previous year.

Form W-3

Summarizing the W-2s the employer sent out during the year is the W-3’s main purpose, making it possible to report total wages.

Form W-9

Employers who work with contractors, freelancers, and other independents must require them to complete this form. It will contain the information needed for reporting how much the company is paying them as nonemployees.

Form 1099

Variations of Form 1099 exist for different purposes. Among the most commonly used are 1099-MISC and 1099-NEC, for reporting nonemployee compensation and other miscellaneous income. They are used by both relevant parties for reporting money paid and received for specific types of transactions.

Form 1096

Employers use this payroll form to log all of their 1099s.

Form 940

This form reports the federal unemployment taxes an employer paid throughout the year.

Form 941

Companies use this IRS Employer’s Quarterly Federal Tax Return form to report totals of certain tax withholdings and employer-portion obligations. It should be accompanied by the company’s quarterly federal income tax payments.

Form 941-X

Employers use this to report and correct errors they’ve made on a previously filed Form 941. As with all types of payroll adjustments, timeliness is key. Corrections should be addressed as soon as an error is discovered.

Form 944

This form serves the same purpose as Form 941 for small businesses with annual tax liabilities of less than $1,000.

Form 8027

If company employees typically receive tips, this payroll form reports the total tip amounts.

Help for proper payroll reporting

Proper management and filing of payroll forms is a crucial business function. It promotes a system for accurate and prompt employee payment and helps both employers and employees avoid costly penalties. Proactively implementing processes for handling the forms and meeting the deadlines should be a top operational priority. Beyond what’s covered here, other forms may be required of your organization for compliance in maintaining payroll records. For help determining exactly what you’re required to use when and how, consult a qualified legal, tax, or third-party payroll specialist.

Business has its challenges. We have solutions. Find ongoing news, tips, tools, and resources for HR, people ops, business management, and more at Workest.

1 Collections, Activities, Penalties, and Appeals, Internal Revenue Service

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