All About Payroll And How It Works
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All About Payroll And How It Works

Payroll is a key function within any business, large or small. However, it mostly goes unnoticed - if it's running smoothly. If there are any problems, then it gets a bad name which lasts. This Factoid looks at payroll - from in-house small business payroll to large business outsourced payroll - how it works, and how businesses get more out of payroll systems.

The saying goes "a good payroll is a quiet payroll". All too often, people only notice payroll professionals when they get something wrong. When they get it right, which is most of the time, it's almost as if they weren't there. However, it's one of the most important functions within any business, large or small, and can cost significant sums of money to get right. Some business choose to keep it in-house, while others outsource part or all of it. So what is payroll, how does it function, and how can you get more out of it?

What is it?

Put simply, payroll is the records and calculations that an employer makes in order to pay employees for the work done. It also covers deductions, from tax at source to other contributions such as benefits, pensions, national insurance, etc. Other payments within payroll include overtime, commission, bonuses, holiday pay and statutory pay, including sick and parental pay.

Complications arise for payroll professionals when employees work either variable or flexible hours, and this often requires systems such as Time & Attendance to produce data that will synchronise with the payroll system. Otherwise, there can be a raft of excel spreadsheets to deal with.

How does it work?

How payroll works depends very much on the situation of the business in question. For example, in smaller businesses, keeping payroll in-house may have its advantages, whereas larger businesses tend to outsource almost every aspect of their pay.

Kept in-house, payroll involves keeping written records of the details of every employee, and calculating tax and national insurance contributions yourself. Equally, all tax returns have to be filed to the relevant authority. Specialised payroll software can be used to calculate the contributions, and you then have to pay your people directly into their bank accounts.

By outsourcing, you use an external agency to manage the calculations and keeping of records, although you must note that you are still legally responsible for deducting the correct amount of tax, and for paying it to HMRC. Outsourcing can be expensive, but providers must be held to key performance indicators and service level agreements.

One of the key aspects of payroll is keeping up with legislative changes, which change frequently. A software package or service provider will do this automatically. For example, recent changes in the National Minimum Wage in the UK have resulted in much confusion, leaving employees £4m in arrears.*

How can you get more out of payroll?

For larger businesses, a payroll accuracy rate of 95% (which is roughly the UK average) means that 5% of employees every month are being paid wrongly. They may be receiving overpayments or worse, underpayments. In the case of the former, the business is spending more, but in the case of the latter, the employee will be dissatisfied, and may even be unable to pay bills as a result of your mistake. Therefore, improving payroll accuracy increases employees' trust in a business's ability to get the basics right.

Businesses with flexible workforces can use payroll data to provide important reports. For example, those with contractors, part-time employees and seasonal staff can look at payroll data to predict future trends and budget ahead.

Ultimately, payroll is a function, though, and its value to your business is limited to not getting it wrong.

* source: article on National Minimum Wage

Image courtesy of Flickr (creativecommons): Images_of_money

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