Preparing payroll involves a series of basic calculations to determine each employee's base pay as well as deductions for state and federal taxes, and employee contributions to retirement funds and health insurance plans. This information is then transferred to individual employee paychecks as well as company records that facilitate the process of tracking information for internal and external tax and financial reporting. Developing a comprehensive and user-friendly payroll system will make your life much simpler when it's time to fill our quarterly and annual tax forms. It will also provide you with clear and useful information for understanding your company's financial activities.
1. Calculate each employee's base pay by multiplying the number of hours worked for wage employees, or by referring to salary levels for salaried employees. If you use payroll software, your program will do these calculations for you. Pay wage employees who work more than 40 hours per week one and-a-half times their base pay rate for any overtime hours.
2. Calculate each employee's state and federal deductions. Use federal tax tables or the percentage method to determine federal income tax withholding, and calculate Social Security and Medicare withholdings by multiplying base pay by .0565 as of 2012. Calculate state income tax according to your state's specific income tax rates. Subtract withholding amounts from each employee's gross pay. Also subtract the amounts of other paycheck deductions such as employee contributions to health insurance plans or retirement funds. Prepare paychecks that clearly show the information you have used to calculate each employee's net pay, including regular and overtime hours, and tax and insurance withholdings.
3. Track payroll information and pay payroll taxes on time. Separate the amounts you have withheld from employee paychecks from general business funds, either by depositing them in a separate bank account until it is time to remit them, or keeping a running total of how much you owe so you don't treat this money as regular operating capital. Make federal tax deposits according to the deposit schedule that the IRS gives you, based on your payroll volume. Complete state payroll tax forms quarterly.
4. Use payroll information in your business accounting to evaluate your company's profitability and financial health. Divide payroll information relative to different tasks and departments. For example, if you own a retail grocery store, track the amount you spend on payroll in the meat department versus the amount you spend in the produce department. Compare these amounts to the revenue from each department to assess the profitability of each section.
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