Posted in Payroll | by: Tomer London

Payroll 101: How Payroll Works

At its core, payroll is about appreciating employees. Payroll is the best way to compensate employees for their hard work and show your appreciation for the value they provide your business. Done well, payroll incentivizes employees to work better, creates a unique company-employee connection, and makes your business more successful. There are four technical aspects of payroll that will help you understand how payroll works:

1) Paying your employees

Building a compensation package

In addition to regular wages, you can administrate special bonuses and commissions to better incentivize your employees. Health insurance or pre-tax benefits are a great way to boost employee retention, and they can save you and your employees tax money. Finally, perks have the potential to make your workplace special, and can serve as a unique tool to attract great talent.

Paying your employees

Direct Deposit is usually the way to go, as it is saves you the hassle of tracking paper checks, and saves your employees a trip to the bank.

Scheduling payroll

Most commonly, businesses pay either on the 15th and 30th of every month on a semi-monthly schedule, or every other Friday on a bi-weekly schedule.

2) Withholding and paying taxes

Employee taxes

When you run payroll, you need to withhold income and payroll taxes from the employees’ pay according to their tax profile, and pay the taxes on time. There are a lot of technical details involved here, but nothing to be worried about if you’re using a modern payroll service. Think about it like driving a car – you should focus on driving, not on how the engine works.

Employer taxes

In addition to withholding and paying the employee payroll taxes, there are additional employer payroll taxes that must be calculated and paid. Your actual employer cost is more than the employee gross pay. It’s the gross pay + employer taxes + other expenses. Total employer cost can be very different from the gross wage, and understanding this will help you make better hiring and budgeting decisions.

3) Reporting to the government

You need to report your payroll tax withholdings, payments and employee statuses separately to your local government, your state government, and the federal government on a quarterly or yearly basis. Reporting requirements often depend on the size of your payroll, and the type of your business. To avoid the headache of filing yourself, make sure your payroll provider will do this for you.

4) Maintaining labor compliance

Different states have different labor regulations regarding minimum wage, overtime rules, labor law posters, employee termination procedures, and more. Fortunately, we’re here to make the rules simple to understand. We’ll cover the major labor compliance rules in a future post to get your business up to speed. Just like good cars come with safety features built in, expect modern payroll services to do the same with compliance. At Gusto, we’ll guide you every step of the way so it’s near impossible to make any compliance mistakes.

About Tomer London

Tomer is the co-founder and Chief Product Officer of Gusto. He is responsible for the development and execution of the product vision — reimagining how modern payroll, benefits, and compliance should operate. Follow Tomer on LinkedIn and Twitter.