How to Process Payroll in 8 Easy Steps
While partnering with a Process Payroll provider is more practical, it is possible to complete your company’s payroll on your own.
- The secret to making sure your employees are paid on time and your legal duties are completed is effective payroll administration.
- Payroll must be tracked and distributed correctly, which involves multiple stages.
- The proper payroll software or service may assist in ensuring that your payroll is completed properly, in compliance with applicable laws, and on schedule.
The target audience for this article is small business owners and human resources specialists who are looking into managing payroll processes.
Because you skip most of the laborious administrative and tax-related work, it’s typically advisable to utilize a payroll provider or consult an accountant when processing payroll. Despite the advantages of outsourcing payroll, many small businesses opt to handle it themselves in order to save money.
There are a few procedures you must follow if you want to complete payroll by hand. The complexity of this procedure will depend on how big your company is. Additionally, if you are not already knowledgeable about payroll and tax law, you can have problems with the IRS.
While this article will provide you some practical advice for processing payroll, you should still speak with a payroll expert or accountant to be sure you’re in compliance with all applicable local, state, and federal employment and tax laws. A simple overview and a more in-depth, step-by-step approach for manually completing your company’s payroll are both provided in this article.
What is payroll processing?
The process used to pay employees at the conclusion of a payroll period is known as payroll processing. To guarantee that pay is accurately computed, recorded, and distributed as well as that the correct amounts for tax, employer benefits, and other deductions are deducted, a number of actions must be taken. The management and administration of payroll is frequently handled by a specialized payroll expert, while it may also come within the jurisdiction of human resources.
Basic payroll processing steps
Think of these basic steps as a roadmap for your payroll process. If you have payroll experience and need a quick refresher, this first set of steps can be a quick resource. If you’re looking for a deeper dive, keep scrolling to see a more detailed guide.
Take these steps before you start calculating pay:
- Get an employer identification number (EIN).
- Establish state or local tax IDs.
- Collect employee tax and financial information, including W-4 forms.
- Set up a payroll schedule.
- Choose the right payroll schedule for your business.
- Establish tax payment dates.
Follow these steps to manually process payroll:
- Review employee hourly schedules.
- Determine overtime pay.
- Calculate gross pay.
- Determine deductions.
- Calculate net pay.
- Issue payments to employees through their preferred delivery method (e.g., paper check, direct deposit).
Keep these things in mind after each pay period:
- Keep payroll records.
- Be aware of potential miscalculations and mistakes.
- Report new hires to the IRS.
How to process payroll
Step 1: Establish your employer identification number.
Setting up your EIN and state and local tax IDs is the first step in processing payroll. These identifications are used by the government to monitor your company’s payroll taxes and make sure you’re complying with laws.
Visit the IRS website to create an EIN if you don’t know it or don’t have one already. You must go via your state and municipality to obtain your state and local tax IDs. Looking for evaluations of the top payroll systems for your small business? We can assist!
Step 2: Collect relevant employee tax information.
Your employees will need to complete a variety of tax forms before you can begin processing payroll so that you can account for allowances and other tax information. These documents consist of the W-4 and I-9 (if it is a new employee). You will need to submit a number of state and municipal forms, but they may vary depending on where your firm is located.
You should also have the following paperwork available before processing an employee’s first paycheck from your business:
Even if the worker never submitted a formal application, keeping it on file guarantees that all pertinent payroll data is centralized.
The worker is eligible to take advantage of business perks like health insurance, a health savings account, or a retirement savings plan. The right sums are deducted each pay period for these benefits thanks to proper payroll processing.
If your workers owe you money for things like child support or IRS payments, you can be compelled by law to take money out of their paychecks. Make sure you have the necessary paperwork on hand and in your records because wage garnishments are court-ordered.
Step 3: Choose a payroll schedule.
You may select a plan that is most effective for your company once you have the necessary tax and legal information to set up payroll. There are four primary schedules: weekly, biweekly, monthly, and semimonthly. Before selecting the strategy that is appropriate for your company, it is critical to comprehend each one. Once you’ve decided on a timetable, create a calendar with paydays and mark the days that you need to handle payroll so that your employees will receive their pay on the designated day.
Include key quarterly tax dates, public holidays, and deadlines for submitting your annual taxes. Remember that you’ll need to do this at the beginning of each year. Additionally, you should decide on each employee’s preferred distribution method. For instance, many companies provide the option of direct deposit or paper checks to their employees.
Step 4: Calculate gross pay.
You may now begin processing your first payroll after creating a payroll schedule. You must determine each employee’s gross compensation, which is equal to the sum of the hours they worked during a specific pay period multiplied by their hourly rate, in order to do this.
To begin, figure out how many hours an employee worked during a certain pay period, keeping track of any overtime hours. According to federal legislation, the additional time must be compensated at a higher rate. You must pay time and a half, or the employee’s hourly wage plus 50% of that amount, if an hourly employee works more than 40 hours per week.
Here’s an example of a gross-pay calculation:
- Worker A has worked 50 hours for your weekly pay period and earns $10 per hour.
- 40 hours x $10/hour = $400
- 10 hours x $15/hour (time and a half) = $150
- Gross pay = $550
Step 5: Determine each employee’s deductions.
To ascertain each employee’s deductions, gather data from their W-4s, federal and state requirements, insurance requirements, and benefits needs. This phase can be challenging since each state has a unique tax structure for small enterprises. To avoid confusion, do your homework on the laws in your state before proceeding. Here are a few typical instances of requirements:
- Federal taxes
- Social Security
- State taxes
- Local taxes
- 401(k) contributions
- Workers’ compensation contributions
- Other benefits
Step 6: Calculate net pay, and pay your employees.
Subtract the deductions from the gross salary of each employee. The employee’s take-home pay, or net pay, is the remaining sum. You will pay each employee this amount. Depending on the schedule you select, you’ll have to keep the deductions and pay them along with your payroll taxes each month or quarter.
You may pay each employee on their scheduled payday once you’ve determined their net compensation. Here are a few ideas of how to compensate your staff:
- Paper checks sent to their address or given out at work
- depositing money directly into their accounts
- Prepaid cards with their take-home pay loaded
- Your workers’ remuneration may be deposited into their mobile wallets with cash (although this method requires more detailed recordkeeping and might be a safety concern)
Step 7: Keep payroll records, and make any necessary corrections.
For tax and regulatory reasons, it’s crucial to maintain track of your transactions while you handle payroll. You need to be prepared with records in case an employee challenges a payment or the IRS requests some form of supporting paperwork later on. It’s crucial to keep records, including year-to-date payments, in case an employee challenges their salary, since this will enable you to resolve any concerns that may emerge.
Step 8: Be mindful of ongoing considerations.
Remember that you must file your company’s taxes both quarterly and yearly. To make sure you comprehend how your payroll taxes fit into this element of company business, it’s vital to speak with an accountant. Any new hires must also be reported to the IRS. This often isn’t your duty whether you deal with a payroll service or an accountant.
What are unpaid payroll tax penalties?
Making sure that your payroll taxes are paid accurately and on time is crucial. Businesses who fail to pay these taxes or don’t pay them on time are subject to unpaid payroll tax penalties. These fines can be incurred if you don’t provide employees their returns, submit Form 941 on time, or pay the Social Security or Medicare taxes that were deducted from their paychecks.
Payroll processing resources
These resources provide additional support as you start your payroll operations:
- IRS withholding calculator
- Payroll steps from the U.S. Small Business Administration
- Employer identification number application
- S. Department of Labor recordkeeping and reporting guidelines
- IRS recordkeeping guidelines
Using payroll services
You may skip all of these stages by working with an accountant or registering for payroll software. If you collaborate with an accountant, you can make sure that the payroll for your company is completed correctly and on schedule.
With payroll software, all you have to do is input pertinent employee data and give your approval for the hours worked. The software automatically computes deductions, gross pay, and net pay. Employees can enter onto online portals maintained by payroll providers to examine pay stubs, end-of-year tax paperwork, and update their personal information. Check out some of our evaluations of businesses like On Pay, Gusto, and Paychex if you’re interested in a payroll service.