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The Payroll Process Explained: How Does It Work?

What does payroll processing include

The Payroll Process Explained: How Does It Work?

Whether you have a small start-up or a well-established, well-developed enterprise, you have to make responsible, forward-thinking financial decisions that effectively save your business valuable resources down the road. If your end-goal is to gain efficiency and manage taxing more easily but you lack the resources or expertise to do it in-house, outsourcing to one of the leading payroll companies in San Diego seems like the obvious choice. 

While outsourcing payroll used to be a practice reserved strictly for major corporations, small businesses everywhere are beginning to recognize the practical reasons to outsource payroll to qualified professionals. And if you want to reap the benefits of outsourcing payroll as soon as possible, now is the time to make the switch and hire a reputable provider of booking and payroll services. 

But let’s assume for a second that you are new to the whole payroll business and want to gain  up-to-date knowledge of what you’ll be paying for and what, in practical terms, are the values of outsourcing payroll. 

So what does the payroll process include and how exactly does it work? Read on to find out all there is to know about payroll.

What is payroll?

What is full cycle payrollBy payroll, we usually mean the amount of money employers pay their employees at the end of every pay period. But the term payroll can also refer to the employees themselves and the relevant employee information. Finally, payroll often refers to the system of processing payments, that is the process by which we determine the amount of money each employee has earned during a pay period: calculation and distribution of wages and taxes.

What is a good payroll percentage?

The optimal percentage of gross revenue that should go toward payroll costs of the majority of small businesses is 15 to 30 percent, although this depends on the industry. The labor costs will be considerably higher in retail, the restaurant industry and other service-based industries than in manufacturing plants which rely heavily on automation. Although there are other ways to analyze and estimate the optimal payroll balance for your business, using gross revenue for scale is thought to be the most reliable one.

What is full cycle payroll?

The period between two payrolls is referred to as a payroll cycle. It is up to you to determine the length of the cycle. For most businesses in the U.S., a normal pay frequency is weekly, biweekly, bimonthly or monthly.

What does payroll processing include?

Aside from keeping track of hours worked and factoring in deductions for employee benefits, the payroll process covers the management of applicable payroll taxes. If you have a solid payroll process in place, you will have safeguarded your business against penalties and fines that you may incur for not adhering to the laws of the Department of Labor.

Small business owners may opt to handle payroll processing in-house or by themselves for the following reasons:

  • Presumed cost-effectiveness
  • Wage information protection
  • Maintaining control over payroll data
  • Last-minute changes

Although this is a low-cost alternative to outsourcing the function to professionals, the process is time-consuming and accompanied by a high risk of error which may put you at risk of costly penalties.

What are the phases of the payroll process?

If you decide to manage the payroll process internally, here is an overview of the basic steps:

  • Fill out the W-4 forms (completed by the employees)
  • Prepare or sign up for Employee Identification Numbers 
  • Select payroll schedule
  • Calculate & withhold income taxes
  • Pay taxes
  • Submit W-2 forms and tax forms

If you decide to have a full-service payroll provider handle the payroll process, these are the steps:

  • Fill out the W-4 forms (completed by the employees)
  • Prepare or sign up for EINs 
  • Update payroll information to add new employees, if any
  • Collect information on time worked and time off

If you decide to outsource payroll, your payroll service provider may also handle the taxes, which is a major benefit.

Put your trust in one of the first-rate tax & payroll companies in San Diego

If you want a responsive provider of time-saving and cost-effective payroll services for your small business in San Diego that can also provide tax preparation services and help you ensure compliance, maximize accuracy and minimize risks of error down the line, David York’s Tax Service fits the bill. We offer competitive rates and prompt and timely services across San Diego County, from the heart of San Diego to Oceanside. Reach out to us today and let us know how we can be of service!