Payroll Setup Decisions

Here are the important decisions you will need to make as you set up payroll:

Will Employees be Hourly or Salaried?
Hourly employees are paid by the hour. Salaried employees receive an annual salary, divided over the number of pays each year. Hourly employees receive overtime, but salaried employees are usually exempt from overtime. Employees are considered hourly and must be paid overtime, unless you can justify the overtime exemption, for professional, managerial, and executive employees.

Read more about exempt vs. non-exempt employees before you decide to classify an employee as exempt.

How Often Are Employees Paid?
Employee pay is calculated based on a pay period. You can set up any pay period you want, paying employees weekly, every other week, twice a month, or monthly. It costs money to prepare a payroll, so you want to keep the number of paydays to a minimum, but employees like to be paid more frequently. Most companies pay either twice a month or every other week.

When is Overtime Paid to Hourly Employees?
You will need to decide when to pay overtime for hourly employees. By law, you must pay overtime at time-and-a-half (1 1/2) if an employee works more than 40 hours in a work week (168 consecutive hours over 7 consecutive days). But you can pay at a higher rate or for fewer hours a week. For example, some employers pay double time for weekend work, or 1/2 times for hours worked over 36 in a work week.

When is an Employee Considered Full-time?
You may decide to have part-time employees instead of full-time hourly employees (salaried employees are almost always considered full-time).

The only difference between part-time and full-time employees is in the hours of work and the number of hours an employee must work to be considered as full-time. This may be any amount of time. Full-time employees usually receive benefits, such as health coverage, while part-time employees do not, so it is important to set a number of hours a week for full-time work.

How Will you Record Time for Hourly Employees?
Salaried employees typically don't record time worked, because the number of hours they work is not relevant to their pay. But hourly workers are paid based on the number of hours they work, so you must have some way to capture this time to substantiate it. You can use timesheets or time cards, computerized software, or some other means. In any case, you should not pay hourly employees unless you have a record of time worked for each pay period. If you would ever get audited, you might find yourself in a difficult situation explaining how you determined pay.