wELCOME TO OUR FREE Payroll COURSE! NO REGISTRATION IS REQUIRED!
YOU WILL LEARN...
- PAYE & NIC BASICS
- The Basics of Payroll
- How to calculate and post wages journals
- And more...
Payroll basics- Lesson 1
An introduction to Payroll...
Payroll is the term used to denote the process of calculating the wages for employees of a business, company, or other entity. Some people refer to payroll as 'doing the wages', 'doing the payroll' or 'running payroll'.
In ancient times (pre-2004), payroll was calculated manually. Thankfully, nowadays nearly all businesses use payroll software to help them with the payroll calculations, generate wage slips, and submit data to tax authorities. Payroll software makes the payroll process much easier and quicker.
Without doing payroll, an employee would simply not get paid, governmental bodies would not receive the income tax deductions taken from employee's wages, and there would be no available documentation for income and tax purposes.
Learning how to do payroll is fairly straightforward, if you have a bookkeeping or accounting background. If you don't have a bookkeeping or accounting background, you will find learning payroll more difficult to learn, especially when it comes to wages journals. If needed, I have a free bookkeeping course with extra sauce here.
In ancient times (pre-2004), payroll was calculated manually. Thankfully, nowadays nearly all businesses use payroll software to help them with the payroll calculations, generate wage slips, and submit data to tax authorities. Payroll software makes the payroll process much easier and quicker.
Without doing payroll, an employee would simply not get paid, governmental bodies would not receive the income tax deductions taken from employee's wages, and there would be no available documentation for income and tax purposes.
Learning how to do payroll is fairly straightforward, if you have a bookkeeping or accounting background. If you don't have a bookkeeping or accounting background, you will find learning payroll more difficult to learn, especially when it comes to wages journals. If needed, I have a free bookkeeping course with extra sauce here.
The Payroll Process
When doing payroll, there are a number of tasks to complete.
Below is a step-by-step guide, in order, to help you learn the tasks needed for running payroll. The guide should be beneficial to anyone, no matter where you are in the world, but the guide was written for those who ideally have businesses based in the UK.
Below is a step-by-step guide, in order, to help you learn the tasks needed for running payroll. The guide should be beneficial to anyone, no matter where you are in the world, but the guide was written for those who ideally have businesses based in the UK.
Step 1 - Register the business or company as an employer
Your first step is to ensure that the business has been registered as an employer with your country's tax authorities. In the UK, this will be HMRC. You can register as an employer with HMRC here.
Once registered, your tax authority should issue unique tax references. These will be needed when submitting any payroll reports and for running payroll. In the UK, these references are the 'employers PAYE reference' and the 'accounts office reference'.
Once the business is registered with HMRC, you will need the above tax references to activate the company's PAYE account. You can do this by logging in to the company's online HMRC account.
Step 2 - Get payroll software
Once registered, you will need payroll software.
Payroll software does not just make doing payroll much easier and quicker, it is also essential, as it is required for submitting monthly and annual reports to HMRC. Reports cannot be submitted to HMRC without payroll software.
For free payroll software (UK businesses), try HMRC basic PAYE tools.
For more extensive software, try Sage Payroll.
Step 3 - Collection of Data
Wages are usually calculated and processed once a month. Some businesses pay employees weekly or fortnightly, though. If this is the case, then payroll will need to be run more often.
Before the payroll can be run, you need to know how much each employee has earned. This is usually different dependent on whether an employee is salaried or receives a wage...
Salaried Employees - A salary is a fixed amount that an employee receives each year, spread throughout the year. To calculate an employee's pay that is salaried, you just need to know their agreed annual pay.
Employees that receive a Wage - If an employee is paid a wage, either through pay per hour or through commission, then you will need the relevant data in order to calculate the employees wage. This is generally found on a timesheet or similar document.
Your first step is to ensure that the business has been registered as an employer with your country's tax authorities. In the UK, this will be HMRC. You can register as an employer with HMRC here.
Once registered, your tax authority should issue unique tax references. These will be needed when submitting any payroll reports and for running payroll. In the UK, these references are the 'employers PAYE reference' and the 'accounts office reference'.
Once the business is registered with HMRC, you will need the above tax references to activate the company's PAYE account. You can do this by logging in to the company's online HMRC account.
Step 2 - Get payroll software
Once registered, you will need payroll software.
Payroll software does not just make doing payroll much easier and quicker, it is also essential, as it is required for submitting monthly and annual reports to HMRC. Reports cannot be submitted to HMRC without payroll software.
For free payroll software (UK businesses), try HMRC basic PAYE tools.
For more extensive software, try Sage Payroll.
Step 3 - Collection of Data
Wages are usually calculated and processed once a month. Some businesses pay employees weekly or fortnightly, though. If this is the case, then payroll will need to be run more often.
Before the payroll can be run, you need to know how much each employee has earned. This is usually different dependent on whether an employee is salaried or receives a wage...
Salaried Employees - A salary is a fixed amount that an employee receives each year, spread throughout the year. To calculate an employee's pay that is salaried, you just need to know their agreed annual pay.
Employees that receive a Wage - If an employee is paid a wage, either through pay per hour or through commission, then you will need the relevant data in order to calculate the employees wage. This is generally found on a timesheet or similar document.
Step 4 - Ensure that all employees are on the payroll system
Before an employee can be paid, you need them on the payroll software.
It is usually very straightforward to add an employee to the system, but you will need to know a number of items...
1. The employees full name, date of birth, and full residential address
2. The employees national insurance number
3. If the employee has any deductions, such as a student loan
4. The employees previous employment details i.e. a P45
5. If the employee has opted out of the workplace pension scheme
Step 5 - Enter employees payment details onto the payroll software
With all the employees setup on the payroll software, and knowing how much the business needs to pay them, you can enter the payment amount for each employee into the payroll software.
Once done, the payroll software should do the following...
1. Calculate the deductions. In the UK, this could be deductions for PAYE (income tax), employees national insurance contributions, student loan deductions, employee pension contributions, and other possible deductions.
2. Calculate the employers costs. In the UK, this could be costs for employers national insurance contributions, employer pension contributions, and other costs.
3. Generate a payslip for the employee that can either be printed or emailed
4. Create a payment report that will need submitting to tax authorities. In the UK, this will submitting to HMRC
5. Calculate the employees net pay i.e. the amount that needs paying to the employee after deductions for tax, NI, etc.
Step 6 - Submit reports to the tax authority
This is pretty self-explanatory. The software should have a submission button. You may need HMRC login details or at least a password to make the submission.
The final steps are also self-explanatory, which are...
Step 7 - Give payslips to all company employees
These can be emailed or printed. These should be given on or before the actual day of payment.
Step 8 - Schedule payment of the net wage to all employees
The net wage should be paid to all employees by bank transfer to their bank accounts. Employees should not be paid in cash.
Step 9 - Schedule payment to tax authorities and pension providers for the amount calculated by the payroll software
There are deadlines for the payment of any deductions and employer costs. In the UK, you will likely need to pay PAYE, employer NI, employee NI, and student loan deductions to HMRC by the 22nd of the next tax month. Employer pension contributions and employee pension contributions will need paying to the workplace pension scheme provider.
Step 10 - Post the wages journals (if applicable)
The wages journals account for the wages, deductions, and costs, on the company's financial accounts. They involve a number of debit and credit entries.
It could be that the company's accountant or bookkeeper will post the wages journals, but you may be required to post these as well as all the previous steps in this payroll guide.
There is more about wages journals below...
Before an employee can be paid, you need them on the payroll software.
It is usually very straightforward to add an employee to the system, but you will need to know a number of items...
1. The employees full name, date of birth, and full residential address
2. The employees national insurance number
3. If the employee has any deductions, such as a student loan
4. The employees previous employment details i.e. a P45
5. If the employee has opted out of the workplace pension scheme
Step 5 - Enter employees payment details onto the payroll software
With all the employees setup on the payroll software, and knowing how much the business needs to pay them, you can enter the payment amount for each employee into the payroll software.
Once done, the payroll software should do the following...
1. Calculate the deductions. In the UK, this could be deductions for PAYE (income tax), employees national insurance contributions, student loan deductions, employee pension contributions, and other possible deductions.
2. Calculate the employers costs. In the UK, this could be costs for employers national insurance contributions, employer pension contributions, and other costs.
3. Generate a payslip for the employee that can either be printed or emailed
4. Create a payment report that will need submitting to tax authorities. In the UK, this will submitting to HMRC
5. Calculate the employees net pay i.e. the amount that needs paying to the employee after deductions for tax, NI, etc.
Step 6 - Submit reports to the tax authority
This is pretty self-explanatory. The software should have a submission button. You may need HMRC login details or at least a password to make the submission.
The final steps are also self-explanatory, which are...
Step 7 - Give payslips to all company employees
These can be emailed or printed. These should be given on or before the actual day of payment.
Step 8 - Schedule payment of the net wage to all employees
The net wage should be paid to all employees by bank transfer to their bank accounts. Employees should not be paid in cash.
Step 9 - Schedule payment to tax authorities and pension providers for the amount calculated by the payroll software
There are deadlines for the payment of any deductions and employer costs. In the UK, you will likely need to pay PAYE, employer NI, employee NI, and student loan deductions to HMRC by the 22nd of the next tax month. Employer pension contributions and employee pension contributions will need paying to the workplace pension scheme provider.
Step 10 - Post the wages journals (if applicable)
The wages journals account for the wages, deductions, and costs, on the company's financial accounts. They involve a number of debit and credit entries.
It could be that the company's accountant or bookkeeper will post the wages journals, but you may be required to post these as well as all the previous steps in this payroll guide.
There is more about wages journals below...
Payroll basics- Lesson 2
Wages Journals Explained
Wages journals are the entries made to the financial accounts to account for the wages owed to employees, as well as the costs to the employer and the deductions and contributions owed to HMRC and pension providers.
The debit and credit entries are made using a journal (or a series of journals) and are primarily for recording wage information, hence the term 'wages journal(s)'. Some people may refer to wages journals as 'payroll journals'.
A wages journal usually consists of two separate journal entries; one to account for the gross wage, net wage and deductions, one for the employers costs. Though, both entries could be combined onto a single journal, if desired.
The debit and credit entries are made using a journal (or a series of journals) and are primarily for recording wage information, hence the term 'wages journal(s)'. Some people may refer to wages journals as 'payroll journals'.
A wages journal usually consists of two separate journal entries; one to account for the gross wage, net wage and deductions, one for the employers costs. Though, both entries could be combined onto a single journal, if desired.
Wages Journal #1 - Employees Wages
The first wages journal is going to account for the gross wage, any deductions, and the net wage. The purpose of the journal is to record the expense incurred by the company for the wages, the net wage owed to employees, and the liabilities owed to tax and other authorities for the wage deductions.
Below is an example of a wages journal...
Debit Gross Wages (expense to the company) 12,000
Credit Employee NI (liability owed to HMRC) 1,000
Credit Employee PAYE (liability owed to HMRC) 2,000
Credit Student Loan (liability owed to HMRC) 500
Credit Net Wage (liability owed to employee) 8,500
Total debit: 12,000
Total credit: 12,000
When payment is made from the bank account for the liabilities owed, the double entry will be debit the liability accounts, which will clear what the company owes, and credit the bank account, which records the payment from the bank.
The first wages journal is going to account for the gross wage, any deductions, and the net wage. The purpose of the journal is to record the expense incurred by the company for the wages, the net wage owed to employees, and the liabilities owed to tax and other authorities for the wage deductions.
Below is an example of a wages journal...
Debit Gross Wages (expense to the company) 12,000
Credit Employee NI (liability owed to HMRC) 1,000
Credit Employee PAYE (liability owed to HMRC) 2,000
Credit Student Loan (liability owed to HMRC) 500
Credit Net Wage (liability owed to employee) 8,500
Total debit: 12,000
Total credit: 12,000
When payment is made from the bank account for the liabilities owed, the double entry will be debit the liability accounts, which will clear what the company owes, and credit the bank account, which records the payment from the bank.
Wages Journal #2 - Employers Costs
The second journal is going to account for employer costs, save the gross wage, which was recorded in the journal above. The purpose of the journal is to record the expense incurred by the company for employer NI and employer pension contributions.
Below is an example of this wages journal...
Debit Employer NI Expense (expense to the company) 2,000
Debit Employer Pension Expense (expense to the company) 1,500
Credit Employer NI Contributions (liability owed to HMRC) 2,000
Credit Student Loan (liability owed to HMRC) 1,500
Total debit: 3,500
Total credit: 3,500
When payment is made from the bank account for the liabilities owed, the double entry will be debit the liability accounts, which will clear what the company owes, and credit the bank account, which records the payment from the bank.
The second journal is going to account for employer costs, save the gross wage, which was recorded in the journal above. The purpose of the journal is to record the expense incurred by the company for employer NI and employer pension contributions.
Below is an example of this wages journal...
Debit Employer NI Expense (expense to the company) 2,000
Debit Employer Pension Expense (expense to the company) 1,500
Credit Employer NI Contributions (liability owed to HMRC) 2,000
Credit Student Loan (liability owed to HMRC) 1,500
Total debit: 3,500
Total credit: 3,500
When payment is made from the bank account for the liabilities owed, the double entry will be debit the liability accounts, which will clear what the company owes, and credit the bank account, which records the payment from the bank.
Do you still need help? Watch the videos below...
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