What do business owners need to know about Payroll?

What is Payroll?

Payroll refers to the process of managing and processing employee compensation, including wages, salaries, bonuses, and deductions. This process includes calculating employee pay, withholding taxes, and other deductions, and ensuring that employees are paid accurately and on time.

Preparing for Payroll

Before you can start running payroll, there are a few steps you need to take to prepare:

Legal and compliance requirements

To ensure compliance with federal and state laws, businesses need to familiarize themselves with the following regulations:

Fair Labor Standards Act (FLSA): sets minimum wage, overtime pay, and record-keeping requirements for businesses.

Employee Retirement Income Security Act (ERISA): regulates employee benefit plans.

Family and Medical Leave Act (FMLA): mandates that eligible employees receive job-protected, unpaid leave for certain family or medical reasons.

State labor laws: vary by state and may include minimum wage, overtime pay, meal and rest break requirements, and other provisions.

Setting up a payroll system

To manage payroll effectively, you’ll need to set up a system that includes:

Payroll software: a tool that can calculate employee pay, withhold taxes, and generate reports.

Payroll schedule: a set schedule for when employees will be paid.

Collecting employee information

To ensure accurate payroll processing, you’ll need to collect and maintain the following information for each employee:

  • Social Security number
  • Tax withholding information
  • Pay rate and pay schedule
  • Employee benefits and deductions

Calculating Gross Pay

Gross pay is the total amount of pay an employee earns before any deductions are taken out. Calculating gross pay depends on the type of employee and their compensation structure:

Hourly vs. salaried employees

Hourly employees are paid based on the number of hours they work. To calculate their gross pay, multiply the number of hours worked by the hourly rate. Salaried employees are paid a fixed amount, regardless of the number of hours worked.

Overtime pay

Non-exempt employees are entitled to overtime pay for any hours worked over 40 hours in a workweek. Overtime pay is calculated at a rate of 1.5 times the employee’s regular pay rate.

Bonuses and incentives

Bonuses and incentives are additional employee payments for meeting specific performance goals or milestones. These payments are typically subject to federal and state taxes.


Deductions are amounts taken from an employee’s paycheck to cover taxes, benefits, and other expenses. Common deductions include:

  • Federal and state taxes
  • Social Security and Medicare taxes
  • Health insurance premiums
  • Retirement contributions

Need help? 

Ensuring your business’s payroll process is both compliant and efficient can be complex and time-consuming. If you’re feeling overwhelmed or uncertain about any aspect of your payroll setup or operations, we’re here to help.

Contact us today to make sure your payroll process is as smooth and trouble-free as possible.

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