If you were born in the era before cell phones, iPads, and high speed internet, then you most likely remember the glorious feeling of your first hard day’s work. Now that technology is rampant, I can barely get my nine year old to put her plate in the dishwasher or take out the garbage. But when I was 11 years old, you would have found me cleaning houses, petsitting, babysitting- YOU NAME IT- for a small amount of money (that was a fortune in my eyes).
At 14, I had a sticky, thankless job working at a snow cone stand. I can clearly remember the woman who hired me whispering, “We are going to pay you under the table,” as she handed me my cash for the day. Naturally, I hadn’t the slightest clue what that meant. I was actually pretty confused that she didn’t literally slide me cash under a table. But I didn’t care how the money came, as long as it was mine. I probably would have cared if I had known, at the time, that I was being employed illegally.
It wasn’t until I got my first “real” job at a local cafe that I was hit with the realities of being paid ABOVE the table. Filling out a W-4 for the first time was a special kind of torture. The legal jargon and questions about deductions were enough to make any teenager’s eyes glaze over, not to mention the absolute shock of getting a first paycheck and realizing how much is withheld. I wish that someone had explained payroll to me back then. I was well into adulthood before I understood the purpose, the ins and outs, and the benefits.
What is payroll and why is it important?
Simply put, it is the total amount of money that a company pays to its employees.
Ok that doesn’t sound too complicated, right?
Now, the idea of CALCULATING payroll is a different matter. After W-4’s, wages, salary, taxes, withholdings, and deductions, before you know it you feel like you are drowning in forms and tables. Many employers will opt to hire independent contractors and go the route of Form 1099, where employees are responsible for paying their own taxes. But this can lead to errors that open up both the employee and the employer to additional taxes and penalties. In order to avoid errors and the stress of figuring it out alone, companies may choose to outsource their payroll duties.
Payroll is an incredible tool that protects both parties and allows employees to seek benefits in the event of misfortune. Hiring a payroll company, like Journey, is a great way for a business to be sure that everything is being handled correctly.
Now that we know WHY payroll is important, let’s break down the individual components. To do this I am going to tell you the story of Lisa, a young retail employee. This is Lisa’s first payroll job. As with many young adults these days, she went straight from high school to college without ever having to work. She was shocked to learn that life outside of her parents’ home was expensive. So, she did the intelligent thing and got a job. But Lisa, being raised with an acute lack of financial education, is going to be very surprised when her first check hits her account this afternoon. (If only someone had taught Lisa about payroll and why it is important.)
What is payroll? To put it in terms of a simple equation, payroll is:
Gross Pay - Deductions - Withholdings = Net Pay
Lisa is a hourly wage employee who makes $20 an hour. If she worked 80 hours in this two week pay period her gross pay would be $1600.
This can include Social Security, Medicare, Insurance, and retirement funds. Let’s say that Social Security is 6.2% ($86.80) and Medicare is 1.45% ($20.3). Let’s also say that Lisa’s company offers an insurance policy where they cover a very generous 70%. Lisa’s insurance costs her $100 per pay period. Her company also has a 401(k)-matching program for up to $200 a month. Lisa, being the intelligent woman that she is, takes advantage of that program and has $100 taken out of every check to go towards her retirement. Her employer then matches both the Social Security and Medicare.
This typically includes federal, state and local taxes. Taxes will be different for each person based on how their W-4 has been filled out. For the sake our example, we will say that Lisa’s federal income tax is 12% ($168) and her state tax is 4.225% ($59.15).
When we return to our equation it looks like this:
$1600 (Gross) - $307.10 (Deductions) - $227.15 (Withholdings) = $1065.75 (Net)
Unfortunately for Lisa, she budgeted her monthly spending based on her gross pay. It is never a good feeling to receive a check and realize that you shouldn’t have used a credit card to go on a shopping spree to celebrate your new job. But life is all about learning lessons!
Thanks to cautionary tales like Lisa’s, we can all learn the importance of making sure that we understand where our hard-earned money goes. It is our job to educate ourselves (and the young people in our lives) so that they enter the world prepared. Payroll is a crucial part of life. It is important that we understand it. And Journey is here to help! It is important that we work for companies which take their payroll seriously and take every precaution to make sure things are done correctly. Choosing Journey is an excellent way to ensure that both employee and employer are secure and protected.
I can honestly say that, although I enjoy the nostalgia, I do not miss the days of cash under the table. No matter how cool I thought I was back then with my apron pocket full of money, payroll equals security, and that is better than stacks of cash any day.