Pay stub errors might happen far more quickly than you anticipate. Consider the employees for whom the monthly salary is their only source of income. Consider what would happen if the money was not paid correctly or if the salary was not released on time. Such inconsistencies might have a negative impact on employee morale and, as a result, on corporate efficiency.
While it is necessary to ensure correct and timely salary payment, compliance with numerous rules and regulations such as labor law, PF, PT, and other statutory compliance is also essential. Noncompliance with these laws can result in serious legal and financial ramifications.
To ensure that your employees are happy and that you comply with the law, you must have a thorough understanding of pay stub and how to operate it efficiently.
- 1 What is the definition of pay stub management?
- 2 Compile and update pay stub data.
- 3 Work out your gross pay.
- 4 Calculate net pay after subtracting pay stub deductions.
- 5 Employer pay stub taxes should be calculated.
- 6 Prepare notebook entries for payroll.
- 7 Run the checks.
- 8 Pay your taxes, health insurance, and retirement contributions.
- 9 Payroll paperwork is created, sent, and stored.
What is the definition of pay stub management?
Running pay stub, remitting pay stub taxes, and keeping relevant documentation all fall under the umbrella phrase of pay stub management. For business owners who would rather spend their time refining their products and planning for the future, these activities are inconvenient.
Implementing a sophisticated pay stub management system can help you save time when it comes to computing pay stub taxes: You are the management, and software is the pay stub clerk.
Pay stub generator and software allows business owners to save countless hours of clerical work. Despite the fact that software alleviates most of the effort, business owners must understand how pay stub works in order to properly set up their program and spot issues.
Compile and update pay stub data.
Give your pay stub software everything it needs to cut accurate paychecks and make necessary tax payments and contributions before you start processing pay stub.
Collect the following documents from each employee throughout the onboarding process:
- Their federal withholdings are listed on Form W-4.
- Forms for state income tax withholding
- The I-9 form is used to verify employment eligibility.
Independent contractors do not submit Form W-4 or state income tax withholding forms since you do not pay pay-stub taxes to them. Instead, they complete Form W-9, which requires you to create year-end tax forms.
After that, set up your company for pay stub:
- Have a unique employer identification number (EIN)
- Obtain a state tax ID number for each of your employees’ residences.
- Choose a paycheck schedule, whether weekly, biweekly, or semimonthly.
- Install a time-tracking system to keep track of hourly workers.
- To expedite pay stub reconciliation, open a separate pay stub bank account.
- Obtain your employees’ direct deposit bank account details.
- Agree on the hourly wage or salary for each employee.
Apart from time tracking, all of this data is directly entered into your pay stub program.
Work out your gross pay.
We’re ready to start calculating paychecks now that we’ve completed the initial pay stub management setup.
Collect time cards or timesheets from non-exempt hourly workers. Keep track of any overtime you work during the pay period, since you may be owed time and a half.
Tipped employees must declare their earnings if you’re processing pay stub for a restaurant. Employers who claim the Federal Insurance Contributions Act, or FICA, tip tax credit must submit tip reports on a daily basis, while others must submit them on a monthly basis.
To prevent manually entering each employee’s hours, use time clock software that interfaces with your pay stub program.
You can now compute gross pay (earnings before taxes and contributions to health and retirement plans), which includes taxes and contributions to health and retirement plans.
Calculate net pay after subtracting pay stub deductions.
There are three types of pay stub deductions: pre-tax, tax withholdings, and post-tax.
To calculate net pay, subtract the following pay stub deductions from the amount your employees see on their paychecks.
Pre-tax deductions reduce taxable wages, such as contributions to health insurance and some retirement programs.
Pre-tax deductions cut your federal income tax bill, but they don’t always lower your total pay stub taxes. FICA (Federal Insurance Contributions Act) taxes on Medicare and Social Security are based on gross pay.
Withholdings on taxes
You withhold a percentage of an employee’s pay for monthly tax payments as an employer. Subtract the following from your gross pay:
- Withholding of federal income taxes
- Withholding of state and local income taxes
- State unemployment tax (SUTA), which varies by state, is one-half of Medicare and Social Security taxes (FICA).
- High-earners will face more Medicare taxes.
- Check out our guide to calculating pay stub taxes for small businesses.
Subtract the employee’s compensation after post-tax deductions. Wage garnishment, payments to a life insurance plan, and Roth 401(k) contributions are all post-tax deductions.
Employer pay stub taxes should be calculated.
Don’t get up and leave the tax table just yet. Employers are responsible for paying taxes depending on employee compensation. They are as follows:
- Unemployment insurance is a tax imposed by the federal government (FUTA)
- Unemployment tax levied by the state (SUTA)
- Medicare and Social Security levies are split in half (FICA)
- Taxes on the local level
- To avoid missing a needed pay stub tax, use our small business guide to employer-paid taxes.
Payroll reconciliation is a good way to double-check your work.
Complete a payroll reconciliation before sending out paychecks. A reconciliation gives you peace of mind that your payroll software is working properly.
While it may appear that this step is superfluous when payroll software automates the process, keep in mind that mistakes do happen, and business owners are ultimately accountable for errors.
Prepare notebook entries for payroll.
Payroll software can typically be integrated with accounting software to create payroll journal entries automatically. The language of accounting is journal entries. Brush up on your bookkeeping skills with Bookkeeping 101.
All costs associated with processing payroll, including wages, employee and employer-paid payroll taxes, and payroll deductions, are included in a payroll journal entry.
Payroll journal entries are more complicated in companies that employ accrual accounting. Many non-cash costs linked with your employees, such as accrued vacation and sick leave, are included in payroll log entries.
Run the checks.
You’ve double-checked the pay stubs of your staff. It’s now time to distribute them.
Attach pay stubs to show how you arrived at the paycheck amount, whether you pay employees via direct deposit or physical checks. Employees will be able to see mistakes and gain a better understanding of where their money is going.
Many states require employers to provide pay stubs, but don’t wait until you’re asked for one. Pay stubs are beneficial to both you and your employees when they are generated with each paycheck.
Pay your taxes, health insurance, and retirement contributions.
In step 3, you deducted taxes and contributions from employee pay, and in step 4, you computed employer payroll taxes. It’s now time to get those payments and donations to their proper destinations.
Your payroll software generally withdraws enough money from your bank account each payroll cycle to make these payments on time.
Check at least quarterly that tax payments and other contributions reach the IRS, state tax authorities, and other third parties, especially for employees who live in states where your company has never paid tax.
Employers must have a state tax ID in order to remit taxes in each state. You must first register on the state tax website to obtain a state tax ID. Before your payroll software can do it automatically, you may have to make the initial state tax payment manually.
Payroll paperwork is created, sent, and stored.
You must send both your employees and the IRS forms about the previous year’s profits, such as Form W-2, Form 1099-MISC or 1099-NEC, and Form W-3, at the beginning of each year. If you are self-employed you must send a 1099 Independent Contractors Form.
I understand that it appears to be a jumble of letters, numbers, and symbols. And because that list isn’t exhaustive, consult a tax professional who is knowledgeable with your state’s tax filing regulations as well as your company’s payroll deductions. This is something that your tax software can help you with as well.
You must preserve a copy of any tax paperwork that you prepare and send out.