Understanding How to Process Payroll

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This is the final segment in our series about California payroll, where you get an understanding of how to process payroll. As a business owner, you will likely not perform the myriad tasks associated with the literal process, but you should obtain a basic knowledge.

When payroll errors are made or paychecks are late you will hear about it. Big errors carry big consequences, such as IRS penalties.

Payroll processing begins with the record of employee hours worked. This can be accomplished by having the employee record daily time and/or absences on a timesheet. On a time clock system, the employee punches in-and-out daily. Timecards are collected and hand-calculated or more sophisticated time clocks calculate the time.

According to in-house policies, managers may be required to sign-off on their employee’s timesheets for accuracy. After collecting approved timesheets, hours worked are input into the system. Paid time off is usually assigned a code; time without pay is given a different code.

Regular time worked and paid time off is calculated using the employee’s base pay rate. Overtime is calculated at one-and-a-half times the employee’s base pay rate. Overtime is time worked over 40 hours in one week.

Next deductions for withholding, insurance, Medicare and time off without pay are calculated. Gross pay minus deductions equal net pay. Your software should contain an option to queue up error reports. The person in charge of payroll processing manually checks for errors.

If your company offers direct deposit, funds are distributed electronically to each employee’s bank. The computer will print paper pay stubs, which can be mailed or hand-distributed to employees. Otherwise, paper checks can be printed for employee distribution.

With an understanding of how to process payroll, you can make an informed decision about keeping payroll in-house or outsourcing to a payroll agency.

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