HR’s Guide to Understanding USA Payroll

At the heart of every company is its workers. Yet workers are the most expensive cost of any company. This is because they must be paid a wage. Dealing with wages means dealing with payroll. HR managers need to have an intimate knowledge of how, when and what employees need to be paid according to USA payroll regulations. 

This guide offers a general breakdown of payroll in the US, how it is calculated, the taxes and other deductions that must be considered. As well, we will look at how HR can best manage payroll functions.

Whether you’re looking for information on payroll services for small businesses or larger companies, this guide will offer answers to the following questions: 

• What is payroll?
• How is USA payroll calculated?
• What taxes are involved in payroll?
• What’s included in a payslip?
• What is involved in payroll compliance? 
• How does employee compensation work?
• What steps must be taken to manage payroll in the USA?
• Automate Payroll with Factorial ✅

In a nutshell, payroll is the total recompense that a company is obliged to pay to its employees for their services. Companies can offer weekly pay, biweekly pay, or monthly pay depending on their business payroll policy. Payroll includes salaries, wages, deductions, bonuses and net pay. Many companies have an in-house accounting department which handles the payroll process. However, another option is to use an external accountant to manage this process. 

If you are looking for the top US payroll solutions, check out our list of the best payroll software.

HR managers must have a solid understanding of what payroll is and how it works in order to follow regulations correctly. Many managers ask the common question, “Is providing employees with a payslip a legal requirement?” The Fair Labor Standards Act (FLSA), sets out the legal requirements for minimum wage, overtime, record-keeping and child labor standards with regards to both full-time and part-time employees. According to the record-keeping sections of this Act, employers must keep records of hours worked and paychecks. This means that if the employer chooses, they can provide the employee with access to view paychecks. However, there is no federal law obligating employers to provide workers with payslips.

US Pay Calculator

Employees can often be confused when, after a hard month’s work, they receive their payslip and see that it was less than they originally thought. They may come to you, as the HR manager, and ask why deductions have been made. It is crucial to understand how pay is calculated and the mandatory taxes and deductions that must be taken from every worker’s salary. Knowing all of this, will also help with maintaining Federal and State compliance, as well as explaining to your workers how it all works. 

In order to work out an employee’s take-home pay, HR managers need to be aware of how the US payroll calculator works. It takes into account the following:

• Federal income taxes
• State income taxes
• Social Security 
• Medicare Insurance 

These are the basic withholdings that must be taken from every worker’s paycheck. Yet the amount of money deducted depends on various factors including income, number of dependents and filing status. Knowing this will help any manager to answer the burning questions workers may have concerning payroll.

A Quick Breakdown of USA Payroll Tax

An important and complex part of any USA payroll system, taxes are withheld from all workers’ paychecks by law. HR must be able to know what taxes apply to their workers and how these are collected. Let’s take a look at some of the key areas related to tax. 

USA Payroll Tax Types 

Taxes include corporate taxes, income taxes, social security, Medicare insurance, sales tax, payroll and withholding taxes, unemployment, workers compensation. These taxes are collected from the employer either by the state, the federal government or sometimes both. 

✔️ Your Guide to Payroll Tax

Rates and Tax Brackets

Tax rates depend on tax thresholds. Federal tax brackets, shown in a tax rate chart, are split according to the amount of money earned. Tax rates range from 10-37%. State taxes vary between states. Both social security and Medicare insurance are divided between employer and employee, each contributing their share.

Tax Withholding 

Employees must fill out a yearly W-4 tax form by April 15th. Depending on what employees earn as indicated on their W-4 tax forms, employers are legally obliged to deduct a percentage from their gross earnings. This will be for federal, state, social security and Medicare insurance. This is the responsibility of the employer.

Returns and Remittance 

Employers provide workers with a W-2 statement on December 31st stating the total taxes withheld from their payslips in the corresponding tax year. An employee is responsible for any outstanding taxes that have not been paid that year. If the employee’s W-4 tax form was accurate, they will not owe further taxes. If the employee paid a higher amount of tax in a year than was necessary, the federal and state governments will then refund them directly. 

Employee Stocks/Shares

Although not obligated, some employers may decide to offer their staff a range of stock options or shares in the business. This withholds a percentage of earnings, which are stowed in the company and can be put towards a retirement program.  

Tax Penalties 

If an employer fails to deduct tax according to an employee’s W-4 form, they will be subject to penalties and heavy fines. It is extremely important that you take account of your workers’ W-4 tax forms. 

Tax Forms 

There are three types of tax forms that an employer must fill out. These are as follows:

• Form 941 – This quarterly form is used to report income taxes, social security tax and Medicare tax withheld from employee’s paychecks. It must be issued by April 30th, July 31st, October 31st, and January 31st. 
• W-2 – Employers must give this form to all employees each year. It shows the employee’s total gross earnings, social security, Medicare insurance, and federal and state taxes. This must be filed by January 31st.
• W-3 – This is a compilation form because it totals all data from the employee W-2 forms. This is due to the Social Security Administration no later than January 31st.

Understanding a Typical Payslip 

So what should be included in a payslip? They typically include gross earnings before deductions, as well as net earnings after deductions. A standard payslip will also state the total amount of hours worked by a person, the pay period and dates. Yet, there is more information to be aware of. Payslips also include the following: 

Company information 

This names and identifies the employer.

Payslip information 

The employee’s name and company ID, as well as the pay period dates, check date and check number are stated.

Current and Year to Date (YTD) Totals

This states the gross earnings, any deductions and net pay for the current period and YTD.

Earnings 

This details every kind of earning the employee has received during this pay period and their YTD totals.

Employee Taxes

This explains how much has been deducted in taxes. It may specify in detail the sums for federal and state tax, social security and Medicare insurance. 

Pre Tax Deductions

These deductions are withheld from an employee’s earnings prior to the taxes being calculated. For example, pension schemes. 

✔️Download Free Payslip Template

Post Tax Deductions

Included in this section could be Combined Fund Drive contributions, union dues, optional insurance selections, and excess payments, if applicable to the employee.

Taxable Wages 

This is the amount of an employee’s salary that is taxable for social security, Medicare insurance and Federal and State tax.

Withholding

This simply states the Federal tax withholding. 

Paid Time Balance

This section shows the available time-off balance at the time employee payroll was processed. It also indicates time-off accrued and used during the pay period. 

Payment Information

This details the net amount of pay and the payment method. 

In order to gain a deeper understanding of payroll services, HR managers should familiarize themselves with all this payslip information. It will help you to answer any questions your workers may have concerning their paychecks. 

USA Payroll Compliance 

So, now you know everything that goes into calculating a paycheck and the deductions and taxes necessary. What further compliance issues should you consider? There are a lot of complex laws surrounding the topic of American payroll. It is extremely important that these are followed, as the employer can be penalized if not. Here are some further compliance issues that should be taken into account, when looking at the following areas: 

USA Payslips 

Although not stated by law, it is common for employers to provide employees with either paper or electronic payslips. However, paperless payslips are becoming more popular. Not only do they help reduce the use of paper, but they are also more efficient. They can save the company time and money. 

Payslip Deductions 

As stated above there are a number of mandatory deductions that must be made by an employer for compliance with the law to be met. These are: 

• Social security and Medicare insurance – The Federal Insurance Contributions Act (FICA) , requires employers to withhold Social Security and Medicare insurance from employees’ wages.
• Income Tax – Both Federal and State income taxes must be shown as being withheld from gross pay on the payslips before an employee is paid. 

Sick Pay 

There is no Federal law stating that sick leave must be given. Yet, many states do require it to be offered to employees by law. This varies between states and employers and is something to consider. 

Maternity Pay

Although the US does not offer paid maternity leave to its workers, parental leave is offered as a benefit by many employers. The Family and Medical Leave Act (FMLA) makes sure that expecting mothers can take time off up to 12 weeks off without losing their jobs. Yet, companies are not obligated to pay them during this time. 

Payroll Record-keeping 

Federal law states that a business must keep an employee’s payroll documents for three years. However, some states including California, New York and Washington, have specific legislation that requires a minimum payroll document retention of six years. It is worth checking the laws of the state you’re in first. A document management system is the best way to easily manage employee payslips, contracts, and other important information.

Employee Compensation 

A common question concerning HR and payroll is “How often does pay need to be issued?” This is worth looking into a little further. It must be pointed out that there is actually no Federal law stating explicitly how frequently an employer must pay their workers. Each state and company may decide differently. For instance, a company may choose to work by a weekly payroll, a semi monthly payroll, or monthly payroll depending on what suits them best. 

There are some other issues that a pay calculator takes into account regarding pay and benefits. These are as follows: 

US Payroll Overtime Pay

If employers require their workers to do overtime, they are generally obliged to pay them at a premium rate when doing the US payroll. This could be 1.5 times their regular rate of pay. According to the Fair Labour Standards Act (FLSA), employees are entitled to receive overtime pay if they work for more than 40 hours in a given week. 

Vacation leave

There is no Federal law obliging employers to offer their workers paid holiday. Yet, that being said, the majority of companies do offer their staff paid holidays. This amount varies between employers, but it is typically around 10 days of paid vacation per year.

Termination Pay 

Many states require that employees whose contracts have been terminated must be paid for the unused time off (time in lieu)that has been accrued prior to their termination. Each employer must establish a written policy for these situations, which HR managers need to be familiar with.

Minimum Wage in USA

The FLSA sets out minimum wage rules. As of 2020, they stated that the current Federal minimum wage in USA is $7.25 per hour. However, some states including Alaska and California use their own minimum wage laws. In this case, employers are obligated to pay whichever rate is higher. 

Managing Payroll in the USA – Use a Pay Calculator

Of course, an important part of any HR personnel’s job is managing payroll. Thankfully, there are a number of payroll solutions that can solve common issues within this area. One option is to do your payroll in-house. Thanks to cutting edge technology, managing payroll online has never been so easy. There are plenty of HR payroll software programs that can be used in-house. The aim of these is to simplify and standardize the entire process of payroll. They use a pay calculator to work out an employee’s take-home pay, as well as the deductions the employer must make. So what are the benefits of doing your own payroll? 

Access to data

You will have immediate and easy access to any financial data within this field whenever you need it. This will be much quicker than having to contact an outside source to find the information for you. 

Affordable

By conducting your payroll in house, your company is sure to save on costs.

If your company is unable to dedicate enough time and energy to managing online payroll services in-house, then there is another option. You might want to consider outsourcing payroll. This directly takes the responsibility of managing this mammoth task out of your hands and places them in someone else’s. So what are the benefits to this? 

• Accuracy

Payroll errors are common and can be messy to clean up. Yet experts are adept in making sure they don’t happen in the first place. They also have a deeper understanding of laws, taxes and regulations surrounding payroll, which means you don’t need to have this expertise in the company.

• Time-saving

By outsourcing this work, you free up this time for other pressing business matters. 

Conclusion

Understanding USA payroll and its various laws and regulations can be tricky. Yet, if well-researched and effective strategies are in place, then there’s no reason why your management of payroll can’t run smoothly. Whether you choose to manage payroll in-house or outsource it, make sure that it’s high on your list of priorities. It is important both for you, your employer and your employees.  

Store Employee Payslips with Factorial HR  [Try it for free]

Written by Charlotte Stace; Edited by Tanya Lesiuk