It is palpable that being a small business owner, you probably might be an expert in your product or service, but not much knowledgeable about payroll which includes compensation and taxes. Also it is not mandatory that all employed people understand the complicated and confusing financial terminology related to their salaries. Although, salary is a form of periodic payment from an employer to an employee, there are certain payroll jargon’s like net salary, gross salary etc. that must be understood clearly. Payroll is a guileless task you must do as you have employees.
With adequate payroll knowledge one can make their payroll process simpler. To run payroll for your small business, there are common payroll terms you need to understand.
Let’s try to understand these payroll terms in a simpler way:
- Gross Pay
Gross pay for an employee is nothing but the amount used to calculate that employee’s wages. The calculation for both salaried and hourly employees is based on an agreed-upon amount for gross pay, which means both the employee and employer have agreed that this is the pay rate. The pay rate needs to be in writing and must be signed by both an employee and employer.
- Net Pay
Net pay is the amount of an employee’s pay (either salaried or hourly) after all deductions subtracted which includes taxes, health insurance premiums and union dues. Thus, net pay is the amount an employee receives in his or her paycheck.
- Premium Pay
In a payroll context, there can be two meanings for a premium pay. One is it can be the extra pay above an employee’s regular rate of pay that is paid for working overtime hours. Secondly it can be a special pay rate for work done on weekends, on holidays and during undesirable shifts.
Overtime is a calculated amount that is paid to employees who work more than a specific number of hours in a work week. Overtime may be determined by the employer, but it can never be less than 1 1/2 times the employee’s hourly rate, for predefined work hours (say 40 to 45 hours) in a work week. Overtime may also be required for some exempt employees too.
Perquisite forms a part of the benefits or amenities granted by an employer to his employee. For instance rent free unfurnished or furnished house, reimbursement of gas, electricity and water, motor car facility, club facility, interest subsidy on loan, reimbursement of medical bills and telephone bills and so on. These benefits may be restricted to a limit, as it is defined on the basis of an employee’s rank or basic salary. Additionally, perquisites cannot be taxed directly because these are non-cash components.
- Form 16
In an organization there is a provision of Tax Deduction at Source (TDS) wherein an employer deducts taxes for all salaried employees at source. In such cases, it is mandatory that the company must issue a Form 16 issued under section 203 of Income Tax Act (India) for Tax, which contains the details about the salary earned by that employee and the total tax deducted. This tax is paid to government of India directly by the company and Form 16 is the proof of employee’s income and tax paid to the government.
PayWheel- HR management software in India is payroll software that helps the HR professionals to deal with complex employee management, salary processing and payroll. For small and medium sized businesses PayWheel is a one-stop solution for every payroll services that includes understanding these complex payroll terms as mentioned above.