In 7 Steps to Payroll

1. What is a payroll statement?
2. What is the difference between payroll and salary statement?
3. What must be included in a payroll?
4. What is the structure of a payroll?
5. Who has to create a payroll?
6. How to create a payroll?
7. Create your own payroll or have it created?
8. Which tools are suitable for creating a payroll?

Every company is obligated to create payroll. This topic raises a lot of questions, especially at the beginning. Starting with the difference between wages and salary. This article gives you answers to these and other questions. We'll explain what a payroll is, how it's structured, what it must contain, and how you can create a payroll step by step. We'll also discuss the benefits of creating the payroll yourself or having it created for you. Lastly, we'll introduce you to some tools with which you can easily create your payroll yourself.

Creating payroll doesn't have to be difficult, it just requires understanding and the right software.

What is a payroll statement?

A payroll statement is a document that presents how an employee's wages are structured over a certain period. All earnings such as wages, allowances, holiday pay, and capital-forming benefits are listed in the payroll, as well as deductions for taxes and social security contributions. Payroll is used to break down the wages for all parties involved and to present them in a transparent manner. According to § 108 of the German Trade Regulation Act, it must be created in text form and can also be made digitally, e.g., as a PDF. It must be ensured that the employees can access the document. When the payroll is due is determined by the employment contract.

What is the difference between payroll and salary statement?

The terms salary and wage are often used synonymously, but there are significant differences. Wage is calculated based on the hours worked or the number of pieces produced and can thus vary. The salary, on the other hand, is an agreed fixed, regularly recurring remuneration to the employees. The basic salary is thus the same every month. The structure and components of a wage or salary statement are very similar. The difference lies in the calculation of gross monthly earnings. With a monthly salary, it's quite simple. It is the remuneration agreed upon in the employment contract. The monthly wage is calculated in various ways, e.g., fixed salary plus premium or hours worked times agreed hourly wage. As an employer, you must note in every wage and salary statement whether it is wage or salary.

What must be included in a payroll?

Certain mandatory information applies to payroll. These are mentioned in § 108 of the Trade Regulation Act. According to the Trade Regulation Act, at least the billing period and the composition of the employment income must be included. But that's not all. There is a long list of mandatory information in the Pay Statement Regulation (EBV) of the Federal Ministry of Labor and Social Affairs, § 108 para. 3 sentence 1 of the German Trade Regulation Act.

Here is an insight into the list of mandatory information:

• Billing period
• Start of employment, possibly end of the employment relationship
• Name and address of the employer
• Name and address of the employee
• Number of children that must be taken into account for tax purposes
• Tax class and tax identification number of the employee, allowances to be taken into account and gross wage
• If applicable, allowances for night, Sunday or holiday work, their type and amount
• Type and amount of other allowances or advance payments, such as Christmas or holiday pay
• Detailed listing of the type and amount of all retained deductions
• The net wage to be paid

In addition to the mandatory information, the payroll may contain other information, e.g., depending on the type of employment. Payrolls in German-speaking countries also differ, e.g., social security contributions are different.

What is the structure of a payroll?

In addition to mandatory information, there is a certain structure established for the payroll. The first part contains general mandatory information such as name, address, tax number, tax class and payment period.

The second part contains the individual components of employment income such as gross salary, tax deductions, social security contributions, tax-free allowances, net salary and payout amount.

The last part often contains the bank account details of the employee, if available, the company pension scheme and possibly a note that the payroll was created according to § 108 para. 3 of the Industrial Code.

This is how the calculation of a payroll structure could look:

Picture: Payroll example

Here is an example of a real payroll from Sage. You can download it in the Sage sample payroll package. Before choosing a solution, an overview of Sage solutions can be provided.

Picture: Real Sage payroll

Who has to create a payroll?

As an employer, you are legally responsible for creating payroll according to § 108 of the Industrial Code. In small and medium-sized businesses, it is often created by the payroll department. Small and medium-sized businesses often let this task be done by an external service provider.

How to create a payroll?

Regardless of whether you use software or create the payroll with a template, the basic steps remain the same. The payroll process consists of five main parts, which are divided into seven steps:

1. Collection of your employees' master data
2. Calculate Payroll statement
3. Create Payroll statement
4. Send the payroll statement
5. Keep the payroll statement

Step 1: Collection of employee data

First, your employees' data must be carefully collected. Make sure that your employees' data is complete and correct. For example, check the social insurance number and tax class, family status, address, date of birth, and bank account details. Here you also record how many hours your employees work and how many existing holiday days they have.

Step 2: Determination of gross earnings

Next, you determine gross income. For this, you need to consider all remunerations your employees have received during the billing period. This includes the basic salary as well as overtime, bonuses, premiums and allowances. All remunerations need to be given in the correct currency. Further information, such as tax exemptions and charges on the gross wage are also recorded.

Step 3: Calculating deductions

Your employees' deductions depend on various factors such as salary, tax class, and social insurance. You also have to take all the relevant contributions such as taxes, social insurance contributions, unemployment insurance, and health insurance into consideration. These vary according to the local legal regulations. In some countries, for example, there is no church tax, while in others a different tax rate applies to higher incomes. Other deductions such as insurance contributions or capital-forming benefits are also recorded.

Step 4: Calculation of net salary

To calculate net earnings, subtract all deductions from step 3. Check here to see if there are any other net deductions that reduce net salary. This could be installments for an employer loan, contributions to capital formation or a salary garnishment.

Step 5: Creating the payroll with payout amount

The payroll statement now contains all the relevant details clearly listed. Here, details such as the employee's bank details and account information are included. If available, it also includes information about company retirement plans. The only thing that's missing now is the payout amount. This is the amount left over after all deductions. This is the amount you transfer to your employees.

Step 6: Submitting reports

Your work is not done with the transfer of the payout amount to your employees. As an employer, you are required to transfer the payroll tax of your employees to the tax office. You have to state the amount of wage tax to be withheld in the wage tax declaration. How often you need to submit the wage tax declaration depends on the amount of wage tax submitted in the previous year. Please observe the legal deadlines and form requirements. Rules and examples for calculating and remitting the wage tax declaration can be found in the Wage Tax Implementation Ordinance (LstDV).

As an employer, you also need to register the contributions to be paid for health, care, unemployment, and pension insurance with all your workers' health insurance funds, and pay the contributions.

Step 7: Archiving the payroll

Now we come to the last step. The payroll must be kept for a certain period of time in case, for example, you need to present it at a tax audit. Payroll is related to payroll tax and therefore has to be kept for at least six years. There are no set regulations as to whether the payroll needs to be stored in digital or analog form. If the documents are relevant for the determination of profit of the company, they must be kept for ten years. If the documents contain claims for benefits from company pension schemes, a retention period of 30 years applies.

There are still some other things you should keep in mind. Always keep your employees' data up to date. Changes can occur, for example, through wage increases or changes of tax category. Check carefully to what places in the payroll the change has an effect.

Just as important is compliance with legal stipulations. You have to consider all current legal stipulations so that the statement meets legal requirements. Here, there are often changes that you must follow in order not to contravene regulations.

If you have made a mistake in the payroll, you have three months to correct it. This is then referred to as retroactive accounting. The situation is different if you have withheld too little payroll tax. A subsequent correction is not allowed.

Create your own payroll or have it created?

Small and medium-sized businesses often outsource payroll to an accounting office or tax consultant. Larger companies usually have their own accounting department for this. Both options have advantages, let's take a look at what they are.

These are the advantages of creating your own payroll:

• Data protection is easier to guarantee as internal data remains internal.
• With supporting software, creating payroll can be done relatively quickly and easily.
• You are independent of third parties, changes can be implemented quickly by yourself.
• It can be cheaper to create payroll yourself.
• You have access to all your employees' data and information at any time.

Here are your advantages if you have the payroll created:

• You save time.
• You can focus on the core business.
• You save costs for own personnel.
• Legal certainty is provided by the expertise of your service providers.
• Advice is readily available when you need it.

Regardless of whether payroll is done internally or externally, most companies use software to facilitate the task.

Which tools are suitable for creating a payroll?

A good payroll program helps you create wage and salary statements. With the help of the software, you only need to enter your employees' master data once. Based on the data you entered, wages and salaries are calculated automatically and monthly payroll is created with a few clicks.

The selection of payroll programs is large – we have put together a small selection for you:

Personio

Sage Lohnabrechnung

DATEV

Lexoffice

ADP Vantage HCM

Teamleader Orbit

Dataline

teamspace

zvoove

paylocity

If you want to delve deeper into the topic of digital payroll, we have the right article for you: "Digital payroll – saving HR and management a lot of time"