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Payroll in the United States

Alex Dees
Growth Lead @ Zeal

Payroll is the act in which an employer pays their employees. Payroll includes salaries, wages, deductions, bonuses, and net pay. Typically, payroll will be on a weekly, biweekly, or monthly schedule. Some of the considerations when running payroll includes how a company will:

  • Pay the employee.
  • Ensure the Employer and Employee have the required legal status to run payroll.
  • Calculate the applicable amount of withholding given an employee’s pay amount, work state, home state, and withholding preferences.
  • Send the withheld payroll taxes to the applicable government bodies on the mandated schedule.
  • Submit the required payroll reports and filing  to local, state, and federal governments.

Processing payroll is one of the most important parts to running a U.S. business. Payment for labor is often the largest cost to a business and can amount to 70%+ of its total expenditure.

Payroll Roles & Responsibilities

The hiring of every new employee requires the restarting of the payroll lifecycle. The Payroll Lifecycle can be broken down into four buckets:

  • Employer: New hire, changes, time data, Form W-4, Form I-9
  • Payroll: Inputs, verifies, processes, distributes, reports, reconciles
  • Government: Tax deposits, monthly and quarterly reports, annual returns
  • Employee: Form W-2, payment, pay advice

Having a repeatable, scalable payroll process will save your business time and money. The HR or payroll leader should be able to document your organizations approach for the following key functions:

  • Paying employees
  • Verifying the integrity of pay data
  • Collecting/inputting time data
  • Inputting new hire information
  • Record keeping
  • Reporting payroll data
  • Distributing paychecks and pay stubs
  • Creating Automated Clearinghouse files
  • Depositing and reporting taxes
  • Communicating with employees
  • Balancing payroll input
  • Modifying existing employee files
  • Reconciling payroll data
  • Processing deductions
  • Researching federal and state regulations

There are many challenges to running a compliant and efficient payroll process in the United States. Because the employer will be held accountable for any payroll missteps, some of the things to be extra aware of are:

  • Complexity: Many federal, state, and local laws affect the way companies can pay their workers. You must evaluate all and see which prevails.
  • Communication: Paychecks are the most scrutinized products of a company. Clear, concise explanations of payroll information benefit employees as well as those who work in payroll.
  • Technology: New software, equipment, and web-based applications can enhance the payroll process as well as human resource functions. Such products can automate timekeeping, record storage, and record retrieval.
  • Accuracy: Ensuring accuracy of employees’ pay is only one part of the accuracy required of a payroll professional.

What are Employers Responsible For in the Payroll Process

The employers are responsible for collecting employee information and data to ensure their pay and withholdings are correct. Employers withhold employee's share of taxes, pay the employer’s share of the taxes, send those taxes to the IRS, and report the employee’s earnings to the SSA. Employers must withhold federal income tax, social security tax, Medicare tax, state income tax, and local income tax from employees’ paychecks. In addition, the company must pay the employer’s share of social security and Medicare taxes and make federal and state unemployment insurance contributions on their behalf.

Unemployment insurance tax is a joint federal-state system. In most states, only the employer is responsible for paying the federal and state unemployment taxes that support the unemployment insurance system. Employees working in Alaska, New Jersey, or Pennsylvania, though, are required to pay part of the state unemployment insurance tax. Like the other taxes discussed above, the unemployment insurance tax in these states is withheld directly from the employees’ paychecks. The federal unemployment tax is not withheld from employees’ wages.

What are Employees Responsible For in the Payroll Process

Employees are required to provide HR with all of their proper and accurate information and data when they are hired. This includes their name, SSN, number of dependents, and their preferred withholdings for taxes.

At year-end, employees will receive payroll information from their employer in the form of a W-2. This details an employee’s withholdings and the amount of money earned and taxes paid over the past year so they can complete their taxes.

Payroll & Accounting Responsibilities

The payroll and accounting departments will typically handle payroll within a company. Depending on the size and makeup of the company this can differ. The HR department will typically collect and enter all of the employee data for the payroll process.

Payroll data can be used when:

  • Accounting records transactions in the company’s account books and prepares financial statements.
  • Cost accounting determines the cost of producing a product or service.
  • Budgeting projects costs and revenues and identifies variances from the budget.

Those in charge of payroll will need to be aware of the United States’ unique approach to payroll & withholding. If a company is not using a payroll product which includes a gross-to-net feature, they need to understand how to deduct federal income taxes, state income taxes, Social Security, and Medicare insurance, as mentioned above. These are basic withholdings that will need to be taken from the workers' checks.

It's also important to develop a reliable, efficient system for the payroll process regardless of the payroll lifecycle at your business. You need to be sure that enough employees are using the right tools to handle the payroll and ensure that your employees are paid on time.

Government Responsibilities

The United States Department of Labor is responsible for setting the labor standards, while the Internal Revenue Service, or IRS, enforces the federal tax laws. Employees in the U.S. can report their Employers for violating the Department of Labor’s labor and wage laws.The IRS requires employers to withhold, report, and pay payroll taxes following their regulations. State and local governments also pass their own payroll legislation.