When you're building a business from the ground up, it's unavoidable that you'll need to hire extra hands when things get busy. And if you hire new employees, you'll have to pay them, which is where payroll comes in.
But what exactly is payroll and what does it entail? In this blog post, I'll define payroll, explain why it's necessary, and discuss the various options for running it within your company.
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What exactly is payroll?
The term 'payroll' originally referred to a list of employees within a company and how much they are to be paid, but it is now more commonly used in reference to employee wages and keeping track of how much money an employee has made over time.
Payroll is critical in any business where people are hired to work. Payroll is required to:
Determine how much your employees should be paid.
Determine how much tax and NIC must be deducted from an employee's gross pay.
HMRC should be informed of employee pay details.
Most importantly, pay your workers!
What are the various components of payroll?
To run payroll, you must first understand what information is required. Here's a breakdown of the various components of payroll.
Employee information
Before you can run payroll, you'll need access to your employees' personal information, such as their name, address, national insurance number, and salary.
You can accomplish this with the assistance of user-friendly online HR software.
Employee working hours
If you pay your employees on an hourly basis, you'll need a system in place to track the hours they work so you can pay them the correct amount.
When it comes to salaried employees, you may want to keep track of when they're working to ensure they're working the hours they're supposed to.
You'll also need to track each employee's sick days, as well as any overtime they've worked, according to your company's policies.
Wages, salaries, and net/gross pay
You must keep track of whether your employees are paid on a salary or an hourly basis, as this will affect how you calculate their pay.
A salary is a monthly pay check that an employee receives. These payments are based on a yearly amount divided into 12 instalments.
However, depending on the nature of your business, you may prefer to pay your employees a wage rather than a salary. A wage is a monetary amount based on the number of hours worked rather than a yearly fixed amount. To calculate their total pay in a given period, you'll set an hourly wage and multiply it by the number of hours worked.
You must indicate the gross and net pay of your employees on their paystubs. Gross pay is an employee's total pay for the period, while net pay is the amount received after taxes and other deductions.
Added compensation
Again, depending on the industry in which your company operates, employees may receive commission and/or tips in addition to their base pay. These will also need to be factored into payroll.
Deductions and taxes
Every employee is required by law to pay tax and national insurance on their total gross pay. This amount varies depending on the total amount earned by the employee and their circumstances. Regardless, it is the responsibility of the employer to ensure that the correct amount is deducted from payroll and paid to HMRC each month. It is critical that you complete this on time each month or you will be penalised.
Employee advantages
Within your company, you may wish to provide a generous benefits package to your employees, as this can help to improve your company culture as well as employee morale and motivation. Private healthcare, a pension plan, and employee discounts are examples of such benefits. It is critical that you include these factors in payroll because some of them can affect how much employees are paid each period.
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