This article covers the basics of payroll processing for Remote Payroll customers. It explains essential steps for accurate and timely employee compensation, including calculating wages, withholding deductions, filing taxes, and arranging net pay.
What is Payroll?
Payroll processing means to compensate employees for their work. It involves calculating total wage earnings, withholding deductions, filing taxes, and arranging the final net pay.
- Payroll will take an employee's gross salary and minus the deductions to calculate the net pay.
- Gross salary is the income before any deductions have been made.
- A payroll deduction is a payment withheld from an employee's salary.
There are a lot of elements to consider when taking an employee's pay from gross to net. These elements will affect how the gross pay is calculated in the first instance.
Payroll Glosseries
- Gross Pay is the total amount an employee will earn before any deductions or taxes are taken out. It includes all sources of income, such as salary, wages, bonuses, benefits, commissions, and any other forms of compensation from an employer.
See more: How is gross pay calculated?, What Impacts Payroll When Considering Gross Pay?
- Net Pay is the amount an individual receives after all deductions, taxes, and withholdings have been subtracted from their gross pay It represents the actual income deposited into the employee's bank account.
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Deduction refers to any amount of money withheld or subtracted from an employee's salary by their employer for various purposes. These can be mandatory or voluntary.
- Mandatory: These are statutory deductions, and are required by law, i.e. income tax.
- Voluntary: These Are agreed upon between the employer and employee, i.e. life insurance.
- Gross To Net refers to the process of transitioning the employee's gross pay to their net pay.
- Pre-Tax Deductions are deductions taken from an employee's pay before taxes are calculated. These are taken from the employee's gross salary and help to reduce their taxable income (country-specific).
- Post-Tax Deductions are deductions taken from an employee's net salary. These will not reduce taxable income and therefore will not affect how much income taxes are owed (country-specific).
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Garnishment is a legal proceeding authorizing an involuntary transfer of an employee's wages to a creditor to settle a debt. In the US, this would also include child support payments.
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It may be called by another name in some countries:
🇦🇺 Australia - 'wage garnishment'
🇩🇪 Germany - 'lohnpfändung'
🇬🇧 UK - 'attachment of earnings'
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Loan is a form of debt where one party agrees to lend money to another. This can be processed on the payroll by deducting the employee's gross salary.
Overview of Tax
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Income Tax is a tax on employees' income, paid to the authorities in a country. It funds various government programs, including public services, infrastructure, and defense.
- Unless an employee is based in one of thirteen countries that don’t withhold any personal income tax, a percentage of an employee’s income will have to be deducted.
- Some countries may not start taxing people until a specific salary is reached.
- Some countries will have a flat income rate, while others increase progressively as the income increases.
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Payroll Taxes are taxes specifically related to employment and used to fund state benefits in a country.
- For example in the UK 🇬🇧, these would be National Insurance Contributions (NIC) to support the healthcare system.
- In the US 🇺🇸, payroll taxes fund social security and Medicare.
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Many other taxes must be considered when calculating an employee's payroll.
- For example, in Italy 🇮🇹, employees pay in addition to income tax, a regional tax based on which part of the country they live in. Each town or city can then add a town tax on top of the regional tax and the town will decide how much the percentage tax should be.
- In the US 🇺🇸, taxes are imposed by state and local governments and differ from the federal taxes collected by the IRS. In addition, Ohio school districts may also implement a school district tax that is separate from state and federal taxes.
Tax systems vary greatly among nations. Organizations must comply with tax regulations in each jurisdiction where they hire.
How is Net Pay Calculated?
Calculating the net pay involves determining the amount an employee takes home after various deductions from their gross salary.
The calculation within each country will differ significantly as each will have its own set of rules and requirements for tax, social security, and other deductions.
Employee Classification
Employee vs. Contractor Classification
Employee classification refers to categorizing workers based on their employment status, job role, and relationship with the employer.
The classification of a worker as an employee or a contractor has important implications for various aspects of employment, including tax obligations, legal responsibilities, and benefits.
Managing this topic comes with great complexity in Global Payroll:
- Laws will vary from country to country
- Laws can be subject to interpretation
- The nature of a working relationship may change over time
An employee is someone hired by a company to perform a specific job or role. Employees are usually paid a salary or hourly wage and are considered permanent members of the company's workforce.
A contractor is an individual or organization that provides services to a company on a temporary or project basis. Contractors are not employees and are typically hired to complete a specific task or service within a set time frame.
Misclassification occurs when an employer incorrectly categorizes a worker as an employee or a contractor. Either intentionally or accidentally, it can result in penalties for the organization.
Organizations can avoid misclassification by understanding and complying with local laws and regulations.
Legal and Regulatory Compliance
Compliance in payroll is essential for organizations to meet the requirements set by government authorities and other regulatory bodies. Understanding and adhering to payroll legislation ensures accuracy in payroll processing and helps minimize employee queries and corrections.
Payroll-related Compliance Glossary
- Minimum Wage Laws ensures all employees are paid at least the minimum wage set by state or local laws.
- Overtime Pay complies with regulations regarding overtime pay for any employee who may work more than the standard number of hours in a week.
- Tax Withholding accurately calculates and withholds income taxes from employees' wages. Errors in calculating income tax can result in underpayment or overpayment which will lead to potential penalties and financial discrepancies.
- Social Security deducts and remits the correct rates of social security.
- Employee Classification ensures your employees are employed under the correct working contract and the relevant legislation is being applied for their sector. Misclassifying employees can lead to errors with all deductions and contributions.
- Record Keeping - All organizations are required to keep accurate and complete records of employee wages, hours worked, and payroll taxes for a specified time.
- Leave and Benefits adheres to any law related to employee benefits, including vacation pay, sick leave, and other statutory leaves.
- Anti-Discrimination Laws ensure employees are not being discriminated against based on disability, pregnancy and maternity, religion, race, and age
- Data Protection and Privacy - Organizations must safeguard employee information and comply with data protection and privacy regulations.
- Labor Laws ensures the wellbeing of employees and ensuring they receive adequate breaks and working hours.
- Equal Pay - By law, men and women must receive equal pay for doing 'equal work.' This means work that is classified as the same, similar, equivalent, or of equal value.
Benefits Administration
Employee benefits are additional compensation and perks employees get besides their regular salary or wages. Benefits attract and retain talent, promote well-being, and enhance job satisfaction.
- They vary by employer, industry, country, and legal obligations.
- Benefits can be monetary or non-monetary. Statutory benefits depend on each country's laws.
- Monetary benefits fall under Benefit In Kind (BIK), funded by employer contributions and employee deductions, and reflected on the payslip.
- Some non-monetary benefits improve well-being, satisfaction, and work-life balance, offered at the employer's discretion.
Benefit in Kind - (BIK)
Benefits in Kind (BIK) are non-cash benefits provided by an employer to their employees that are not part of their salary. These advantages or services have a monetary value and are meant for personal use. By definition, any benefit with a monetary value is considered a BIK.
Some of the most common BIK examples will include company cars or a phone allowance.
Monetary Value Benefits
- Health Insurance can include medical, dental and vision insurance. Employers can choose to expand the cover to include employees dependents. Providing health insurance helps to ensure both the welfare and productivity of employees.
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Retirement Plans / Pension Employers will often provide retirement saving plans to help employees to save for their future.
- In the UK 🇬🇧, as long as you are eligible for automatic enrollment, employers must make contributions to your pension.
- In the USA 🇺🇸, the plan is referred to as the 401(k) and employees will have contributions taken automatically from their salary with employers choosing to match or contribute the same value.
- Life Insurance In the event of an employee's death, life insurance helps the beneficiary's family financially.
- Stock Options Some organizations will offer their employees stock options or equity in the company. This benefit will have financial value because it allows employees to potentially purchase company shares at a price lower than the current market value, enabling the employee to profit from any increase in the stock price.
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Meal Vouchers is offered in some countries.
- In Spain 🇪🇸, usually for the amount of 11,00€ per day per employee. Up to this amount is tax-free and the rest is taxable.
Non-Monetary Value Benefits
- Employee Wellness can be referred to as Employee Assisted Programs (EAP's).
This offering provides counseling and support services to help employees deal with personal or work-related issues.
Employers aim to promote employee health and well-being.
- Unlimited PTO does not have financial gain for the employee as it does not incur any direct salary increase for the employee.
More commonly now, employers will offer employers unlimited PTO. This provides additional days on top of any statutory given days. It is provided to help promote a work-life balance.
It is worth noting, that PTO varies significantly in every country. In the USA, there is generally no statutory minimum for leave entitlement. It is at the discretion of the employer if they want to offer PTO. In the UK, employees must receive at least 28 days paid annual leave a year as a minimum.
- Flexible Working can be offered to their employees to allow them to have more control over when, where, and how they work.
This can include choosing your working hours, and working days and allowing fully remote work from home.
Statutory Benefits
These are benefits required by law and each country will have its own set of requirements that employers must comply with.
How to Process Benefits in Payroll
- Benefit costs are split between the employer and employee, deducted from the employee’s salary, and shown on the payslip.
- A dedicated team manages enrollments, processes changes, and ensures compliance.
- Employers must ensure benefit offerings meet minimum contribution levels.
Step 1: Employee Enrollment
The employee typically enrolls or selects their benefits during the onboarding stage of employment.
Step 2: Benefit Deductions
Once benefits selections are made, the corresponding deductions (if applicable) will be calculated based on the chosen coverage levels and contribution amounts. Some benefits may be fully covered by employers, eliminating employee deductions. This decision is at the employer's discretion.
Step 3: Payroll System Alignment
The payroll system should be configured to accurately calculate and process benefit-related deductions for employees.
Step 4: Integration with Benefits Administration System
Some organizations may integrate their payroll system with a benefits administration system. This integration streamlines managing benefit enrollments and changes in one place.
Step 5: Change in Personal Circumstances
The employee must inform the payroll team of any life events that impact their benefits, such as marriage, having children, or changes in the number of dependents.
Step 6: Year-end Processing
During the year-end process, payroll teams will reconcile any benefit-related data and ensure all payments are accurate and compliant.
Step 7: Auditing
Regular audits of benefit-related data ensure accuracy by reviewing payroll records and reconciling them with benefit statements.
Payroll Auditing and Error Correction
A payroll audit ensures employees are paid correctly and that all deductions and reports are accurate. Audits are essential for maintaining compliance and transparency within the payroll department.
Record-Keeping and Documentation
A payroll record includes any documentation generated by an organization that relates to an employee, their compensation, work hours, and anything related to pay.
It represents an organization's due diligence as an employer.
What Information is detailed within these records?
- Employee personal information (name, address, date of birth, social security number). This refers to PII generally which is Personally Identifiable Information.
- Employment information (Offer letters, contracts, references, background checks)
- Timesheets (Hours worked, overtime, pay period)
- Pay Information (Rate of pay, agreed working hours, employee's classification)
- Tax Documents (Any tax forms, i.e. W-4 in the USA)
- Deduction Information (Benefit deductions, garnishment)
- Paid and unpaid leave records (PTO, vacation balance, sick leave, other leave types)
- Salary deposit information (Bank name and account number)
- Expense forms (Expense reports for travel, meals)
Year-End Processing
Year-end is the process of finalizing payroll-related activities for a specific calendar period.
The year-end requirements will differ in every country and each will have varying deadlines to be considered throughout the process and these statutory dates must be achieved.
Examples:
🇦🇺 The tax year for Australia is July 1 - June 30
🇫🇷 The tax year for France is January 1- December 31
🇩🇪 The tax year for Germany is January 1- December 31
🇮🇳 The tax year for India is April - March
🇬🇧 The tax year for the UK is April 6 - April 5
🇪🇸 The tax year for Spain is January 1- December 31
🇨ðŸ‡The tax year for Switzerland is January 1 - December 31
🇺🇸 The tax year for the US is January 1- December 31
What Action Does the Employee Take?
For employees, the year-end process involves receiving important documents and information related to their income and taxes, which vary by country.
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