Payroll is defined as the total amount of wages paid by a company to its employees and other workers. Your company’s payroll maybe your firm’s largest business expense, and processing payroll is complicated. You must collect insurance premiums, retirement plan contributions and tax withholdings from employee pay.

While hiring full-time employees can help your business grow, it also adds complexity and cost to the operation. This shouldn’t deter from your hiring, but you should understand how much each worker will cost beyond their salary, as well as the work involved in managing payroll.

Here’s an overview of how payroll is processed and how to comply with federal and state requirements.

The Components of Payroll

Your firm’s payroll can be separated into these four component parts:

1. Gross Wages

The total dollar amount paid to the worker, before any deductions. The items listed below are deducted from gross wages to arrive at the worker’s net pay. Gross wages may include commissions, bonuses and other payment arrangements.

2. Benefits

Your company may provide health insurance, retirement plans and other benefits to workers. While your business pays some of these costs, a portion of the benefits may be deducted from the employee’s gross wages. Many of these deductions are taken out of pay before taxes are calculated.

3. Social Security and Medicare

You must deduct the employee’s portion of Social Security and Medicare payments from gross wages. Your employees may have additional deductions that are required by federal or state law.

4. Tax Withholdings

The employer must withhold the employee’s share of federal and state income taxes from payroll. Depending on the location, the company may also need to withhold local or city income taxes from payroll.

The amount of money the employee actually receives in their paycheck is known called net pay.

It’s important to note that freelancers are treated differently than employees. Since a freelancer is not an employee, this type of worker receives his or her gross pay with nothing deducted. Freelancers are responsible for paying all of their own taxes and benefits.

A payroll service will help you sort out your companies payroll.