The Basics of Payroll

Many forms of compensation are included in the Payroll category of a business expense, including salaries, wages and bonuses, but also employer paid benefits like sick days and paid vacations.  Specific rules exist regarding pay structures for types of employees, and are subject to state and federal laws, labor contracts and company policies.

Salaries are paid to executives, professionals, managers and office employees, often bi-weekly, on a flat annual amount.  Bonuses and commissions paid to employees are generally reported as Salary as well.  Wages are typically associated with workers whose pay is dependent on the hours they work.  They are paid weekly or bi-weekly, which can present challenges for proper reporting on the financial statements.  If the pay period crosses over calendar months, the accountant will need to prepare an accrual-type adjusting entry to the financial statement for the month.

When an employee works more than 40 hours in a particular week, they MAY be eligible for overtime pay.  However, not all employees are eligible.  Highly compensated individuals who can control their hours worked in a week are considered “exempt” and do not get paid overtime pay.  Hourly employees are “non-exempt” and are paid an overtime premium of “time and a half”.  And lower-paid salaried employees also qualify for overtime pay.

The rules for how an employee must be paid are specific and designed to prevent unfair treatment to the employee.  It is critical that you classify and pay your employees property.  Trying to classify someone as salaried when they should be hourly can get you in hot water legally and increase your expenses with legal fees.  Understand state and federal laws and help you avoid legal issues due to improper classification and pay of your employees.