Eddy’s HR Mavericks Encyclopedia
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Paycheck
We all know how important getting paid is. But how does that paycheck get to your employees on time and accurately? Let's look at best practices around payday.
What Is a Paycheck?
A paycheck is the way an employer pays their employees for the work performed. Traditionally, it’s a paper document issued by the employer to the employee. A paycheck also provides information about an employee’s wages, including taxes or other deductions.
Why Is It Important to Issue Accurate and Timely Paychecks?
We all want to get paid for the work we do. Employees might be pulled to their job because they are passionate about it, enjoy who they work with, or believe in the company culture. However, if they aren’t receiving a paycheck, they won't show up to work. Here are some other key reasons why it is so important that paychecks are accurate and issued in a timely manner.
- Employee appreciation. It seems obvious, but employees feel appreciated when they are paid on time. By paying the correct amount in a timely manner, you are telling them that you appreciate the work they are doing and showing them you are grateful for their contributions.
- Employee retention. If you want to hold onto your employees, you need to be sure you are paying them correctly and on time. If you fail to pay an employee on time even once, it can leave a bad taste in their mouth about you as an employer. In fact, 24% of employees in America will start looking for a new job if they experience just one issue with their paycheck, while that number jumps up to 49% if they experience at least two paycheck issues.
- Employee wellness. Failing to pay employees on time and accurately can cause issues for them. Depending on the study, 2021 research shows that anywhere from 54% to 78% of Americans live paycheck to paycheck. That means that over half the population might be put in a difficult financial situation if their paycheck is delayed or they are paid an incorrect amount. Aside from the very real consequences this can cause, such as late rent or scanty groceries, it can also lead to the employee choosing to look for employment elsewhere, being less productive, or holding a negative view towards the company or payroll team.
Components of a Paycheck
In its most basic form, the formula for a paycheck is gross pay – deductions = net pay. Let's look at these components in a little more detail.
Gross Pay
Gross pay refers to the total amount of an employee’s wages. It is the amount prior to taxes, deductions, or any other wage withholdings. It includes:
- Base pay is what an employee earns before any additional payments. For salaried employees, this is the same amount every pay period. For hourly employees, this reflects the number of hours they worked in the pay period multiplied by their hourly wage.
- Overtime refers to any wages earned for working overtime hours. Every state has different overtime laws, but federal law is that any hour worked over 40 hours in a week is considered overtime and should be paid at a time-and-a-half rate.
- Performance bonuses, commissions, or profit sharing. These amounts are determined by the employer and are based on performance, metrics being met, the success of a company as a whole (profit sharing), etc.
Deductions
Deductions refer to all the withholdings that make up the difference between net pay and gross pay. This could include taxes, garnishments, or amounts withheld for benefits such as health insurance or 401K accounts.
Net Pay
Net pay refers to the amount an employee receives after taxes, deductions, or any other withholdings. It is sometimes referred to as “take-home” pay and is the amount the check is written for.
Legal Requirements for Paychecks
There are many laws when it comes to dealing with an employee’s pay. It is important that you are aware of them so you can ensure compliance. Here are some legal requirements to consider with paychecks.
Minimum Wage and Overtime Laws
When processing paychecks, make sure you are paying employees the right amount. Every employee needs to be paid at least the federal minimum wage of $7.25, but states' minimums are often more than that. For guidance on what your state minimum wage requirement is, click here. You also need to be sure you are paying your employees the correct overtime hours. All non-exempt employees need to be paid time and a half for any overtime hours they work in a week. On a federal level, any hour worked over 40 hours in a week is considered overtime. Some states, such as Alaska, California, Nevada, Puerto Rico, Virgin Islands, Colorado, and Oregon have daily overtime laws.
Payroll Frequency
There are also laws about payroll frequency. Do you pay your employees weekly, bi-weekly, semi-monthly, or monthly? A company that fails to pay its employee frequently enough may be liable for a wage claim filed against them by an employee. This suit can force a company to pay additional wages and court costs. Each state has different payroll frequency laws. Click here to see what your state’s payday requirements are.
Payroll Records
The Equal Employment Opportunity Commission (EEOC) requires that personnel and employment records be kept for at least a year. Nowadays, most of those records are kept electronically in an HRIS, but if you keep paper records, be sure to keep records of all the paychecks an employee has been paid for at least one year. This includes at least a year after an employee is terminated. When it comes to taxes, the Internal Review Service (IRS) requires employers to keep employment tax records for at least four years after they are filed. Payroll records also document timesheets and overtime worked in the event that an employee files a wage claim against you.
Deductions and Witholdings
Failure to withhold taxes or to withhold the right amount can lead to civil and criminal penalties from the government. Also, no employee likes money being taken out of their paycheck, so it is important to understand the different deductions and withholdings and be able to explain them clearly. Most payroll systems program deductions, withholdings, or taxes, depending on what the employee asks to have taken out and the state the employee works in.
Best Practices for Administering Paychecks
Any time you are dealing with an employee's money, you want to be very careful how you are handling it. Here are some best practices to consider when administering paychecks.
Payroll Calendar
A payroll calendar makes employees aware when payroll is being processed and when they will be paid. It also helps you stay organized and meet deadlines so you can stay on track and pay employees correctly and on time.
Automate Your Processes
In order to avoid human error and cut back on time-consuming tasks, automate as many processes as possible. This will help avoid errors and speed up the process in the event that you have to pay an employee within a shorter time frame. Automation allows you to focus more on the employee experience than the processes that go into it.
Don’t Overload One Employee
Some people might consider paying employees a simple task — you just multiply the hourly rate by how many hours they work. It is just a lot of time spent in spreadsheets, right? Anyone can do it. Those are all thoughts that can lead to putting all payroll duties on one person. This can lead to burnout and payroll errors as an employee attempts to process large amounts of checks in a short period of time. If possible, payroll duties should be shared with multiple people. This allows employees to help each other out and not get burned out too quickly.
Document Everything
Much like anything else HR-related, document everything!
- Document your entire payroll process so that someone can step in and help if needed.
- Clearly document what each employee has been paid and why. If an error on a paycheck occurs and someone is paid incorrectly, you need that documentation to understand where the mistake occurred and remedy it quickly.
Mistakes Happen
Payroll errors do occur. Best practices to handle these occasions include:
- Handle it quickly. The longer an issue lingers, the more issues it is likely going to cause. Apologize and resolve the issue with the employee fast.
- Learn from it. As mentioned previously, payroll mistakes are a quick way to lose employees. When these mistakes do occur, try to understand what happened and make changes if needed so that it doesn’t happen again.
- Show empathy. Whether it’s you or someone else on your team that makes the mistake, practice empathy. Mistakes do happen, and failing to show empathy to you or your team members can create a culture where employees are afraid to make mistakes rather than focusing on how to learn from them.
Topics
Tanner Pierce, PHR
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.
Frequently asked questions
Other Related Terms
Eddy’s HR Mavericks Encyclopedia
Paycheck
We all know how important getting paid is. But how does that paycheck get to your employees on time and accurately? Let's look at best practices around payday.
What Is a Paycheck?
A paycheck is the way an employer pays their employees for the work performed. Traditionally, it’s a paper document issued by the employer to the employee. A paycheck also provides information about an employee’s wages, including taxes or other deductions.
Why Is It Important to Issue Accurate and Timely Paychecks?
We all want to get paid for the work we do. Employees might be pulled to their job because they are passionate about it, enjoy who they work with, or believe in the company culture. However, if they aren’t receiving a paycheck, they won't show up to work. Here are some other key reasons why it is so important that paychecks are accurate and issued in a timely manner.
- Employee appreciation. It seems obvious, but employees feel appreciated when they are paid on time. By paying the correct amount in a timely manner, you are telling them that you appreciate the work they are doing and showing them you are grateful for their contributions.
- Employee retention. If you want to hold onto your employees, you need to be sure you are paying them correctly and on time. If you fail to pay an employee on time even once, it can leave a bad taste in their mouth about you as an employer. In fact, 24% of employees in America will start looking for a new job if they experience just one issue with their paycheck, while that number jumps up to 49% if they experience at least two paycheck issues.
- Employee wellness. Failing to pay employees on time and accurately can cause issues for them. Depending on the study, 2021 research shows that anywhere from 54% to 78% of Americans live paycheck to paycheck. That means that over half the population might be put in a difficult financial situation if their paycheck is delayed or they are paid an incorrect amount. Aside from the very real consequences this can cause, such as late rent or scanty groceries, it can also lead to the employee choosing to look for employment elsewhere, being less productive, or holding a negative view towards the company or payroll team.
Components of a Paycheck
In its most basic form, the formula for a paycheck is gross pay – deductions = net pay. Let's look at these components in a little more detail.
Gross Pay
Gross pay refers to the total amount of an employee’s wages. It is the amount prior to taxes, deductions, or any other wage withholdings. It includes:
- Base pay is what an employee earns before any additional payments. For salaried employees, this is the same amount every pay period. For hourly employees, this reflects the number of hours they worked in the pay period multiplied by their hourly wage.
- Overtime refers to any wages earned for working overtime hours. Every state has different overtime laws, but federal law is that any hour worked over 40 hours in a week is considered overtime and should be paid at a time-and-a-half rate.
- Performance bonuses, commissions, or profit sharing. These amounts are determined by the employer and are based on performance, metrics being met, the success of a company as a whole (profit sharing), etc.
Deductions
Deductions refer to all the withholdings that make up the difference between net pay and gross pay. This could include taxes, garnishments, or amounts withheld for benefits such as health insurance or 401K accounts.
Net Pay
Net pay refers to the amount an employee receives after taxes, deductions, or any other withholdings. It is sometimes referred to as “take-home” pay and is the amount the check is written for.
Legal Requirements for Paychecks
There are many laws when it comes to dealing with an employee’s pay. It is important that you are aware of them so you can ensure compliance. Here are some legal requirements to consider with paychecks.
Minimum Wage and Overtime Laws
When processing paychecks, make sure you are paying employees the right amount. Every employee needs to be paid at least the federal minimum wage of $7.25, but states' minimums are often more than that. For guidance on what your state minimum wage requirement is, click here. You also need to be sure you are paying your employees the correct overtime hours. All non-exempt employees need to be paid time and a half for any overtime hours they work in a week. On a federal level, any hour worked over 40 hours in a week is considered overtime. Some states, such as Alaska, California, Nevada, Puerto Rico, Virgin Islands, Colorado, and Oregon have daily overtime laws.
Payroll Frequency
There are also laws about payroll frequency. Do you pay your employees weekly, bi-weekly, semi-monthly, or monthly? A company that fails to pay its employee frequently enough may be liable for a wage claim filed against them by an employee. This suit can force a company to pay additional wages and court costs. Each state has different payroll frequency laws. Click here to see what your state’s payday requirements are.
Payroll Records
The Equal Employment Opportunity Commission (EEOC) requires that personnel and employment records be kept for at least a year. Nowadays, most of those records are kept electronically in an HRIS, but if you keep paper records, be sure to keep records of all the paychecks an employee has been paid for at least one year. This includes at least a year after an employee is terminated. When it comes to taxes, the Internal Review Service (IRS) requires employers to keep employment tax records for at least four years after they are filed. Payroll records also document timesheets and overtime worked in the event that an employee files a wage claim against you.
Deductions and Witholdings
Failure to withhold taxes or to withhold the right amount can lead to civil and criminal penalties from the government. Also, no employee likes money being taken out of their paycheck, so it is important to understand the different deductions and withholdings and be able to explain them clearly. Most payroll systems program deductions, withholdings, or taxes, depending on what the employee asks to have taken out and the state the employee works in.
Best Practices for Administering Paychecks
Any time you are dealing with an employee's money, you want to be very careful how you are handling it. Here are some best practices to consider when administering paychecks.
Payroll Calendar
A payroll calendar makes employees aware when payroll is being processed and when they will be paid. It also helps you stay organized and meet deadlines so you can stay on track and pay employees correctly and on time.
Automate Your Processes
In order to avoid human error and cut back on time-consuming tasks, automate as many processes as possible. This will help avoid errors and speed up the process in the event that you have to pay an employee within a shorter time frame. Automation allows you to focus more on the employee experience than the processes that go into it.
Don’t Overload One Employee
Some people might consider paying employees a simple task — you just multiply the hourly rate by how many hours they work. It is just a lot of time spent in spreadsheets, right? Anyone can do it. Those are all thoughts that can lead to putting all payroll duties on one person. This can lead to burnout and payroll errors as an employee attempts to process large amounts of checks in a short period of time. If possible, payroll duties should be shared with multiple people. This allows employees to help each other out and not get burned out too quickly.
Document Everything
Much like anything else HR-related, document everything!
- Document your entire payroll process so that someone can step in and help if needed.
- Clearly document what each employee has been paid and why. If an error on a paycheck occurs and someone is paid incorrectly, you need that documentation to understand where the mistake occurred and remedy it quickly.
Mistakes Happen
Payroll errors do occur. Best practices to handle these occasions include:
- Handle it quickly. The longer an issue lingers, the more issues it is likely going to cause. Apologize and resolve the issue with the employee fast.
- Learn from it. As mentioned previously, payroll mistakes are a quick way to lose employees. When these mistakes do occur, try to understand what happened and make changes if needed so that it doesn’t happen again.
- Show empathy. Whether it’s you or someone else on your team that makes the mistake, practice empathy. Mistakes do happen, and failing to show empathy to you or your team members can create a culture where employees are afraid to make mistakes rather than focusing on how to learn from them.
Topics
Tanner Pierce, PHR
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.
Frequently asked questions
Other Related Terms
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