The proper payroll software or
service may assist in ensuring that your payroll is completed accurately, in
compliance with applicable laws, and on schedschedule.
The target audience for this article
is small business owners and human resources specialists who are looking into
managing payroll processes.
Because you skip much 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.
When you'reThere are a few steps you
need to do if you're interested in processing payroll manually. Depending on
the size of your business, this may be a very difficult procedure, and if
you're not already an expert in payroll and tax law, you could have problems
with the IRS.
While this guide will give 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 end of a payroll period is known as payroll processing. To guarantee that
pay is accurately computed, tracked, and distributed as well as that the
correct amounts for tax, employer benefits, and other deductions are withheld,
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 fall
within the purview of human resources.
The Best Online Payroll Services of 2023
Choosing a payroll
service is a big decision, so business.com looked at dozens of options to come
up with the following recommendations.
Consider these fundamental steps to
be a road map for your payroll procedure. This initial set of procedures can be
a quick resource if you have payroll experience and need a quick review. Scroll
down to see a more thorough guide if you want to take a deeper dive.
Take these steps
before you start calculating pay:
Obtain a business identification number.
(EIN).
Create municipal or state tax
identification numbers.
Gather financial and tax data from
employees, such as W-4 forms.
Schedule the payroll.
Select the ideal payroll schedule for
your company.
Decide when taxes are due.
Follow these steps to manually process payroll:
Examine the hourly schedules of the workers.
Establish the overtime compensation.
Determine the gross pay.
Calculate deductions.
Determine the net pay.
Pay employees using their preferred mode of delivery (e.g.,
paper check, direct deposit).
Keep these things in mind after each pay
period:
Maintain payroll records.
Be mindful of possible errors and
miscalculations.
Inform the IRS of new hires.
Key Takeaway
Gathering employee data, creating a payroll
plan, keeping track of time worked and money owing, sending payments, and
maintaining correct records are the fundamental steps in the payroll processing
process.
How to process payrol
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 through your state and municipality to
obtain your state and local tax IDs. Looking for reviews 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:
Job application: Even if the worker never submitted a formal
application, having it on file guarantees that all pertinent payroll data is
centralized.
Deductions: The worker is eligible to take advantage of
business perks like health insurance, a health savings account, or a retirement
savings plan. Proper payroll processing ensures that the correct amounts for
these benefits are withheld each pay period. Wage garnishments: You may be
required by law to garnish your employees’ wages if they owe money, such as IRS
payments or child support. Wage garnishments are court-ordered; ensure you have
the proper documentation on hand and in your records.
Step 3: Choose a payroll schedule.
There are four main schedules: monthly, semimonthly,
biweekly, and weekly. It's important to understand each plan before
deciding which is best for your business. Once you choose a schedule, set
up a calendar with paydays, and make note of the days when you'll have to
process payroll for your workers to get their money on that defined day.
You'll want to specify the preferred delivery method and
build in crucial quarterly tax dates, holidays, and annual tax filing
deadlines, keeping in mind that you'll need to do this at the beginning of
every year. way for every worker, for illustration. businessesgive workers the
option of a paper check or direct deposit.
Step 4: Calculate gross pay.Now that you’ve
set a payroll schedule, you can start processing your first payroll. To do
this, you must calculate each employee’s gross pay, which is the total number
of hours an employee works in a given pay period multiplied by their hourly
rate.
Start
by calculating the number of hours an employee has worked in a given pay
period, and take note of overtime hours.
The extra time has to be paid out at a higher rate consistent with federal law. If
an hourly worker puts in more than 40 hours per week, you’ll have to pay time
and a half, or an employee’s hourly wage plus half that wage.
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.
Gather
information from your workers’ W-4s, federal and state requirements, insurance
requirements, and benefits requirements to determine each employee’s
deductions. This can get complicated; each state collects different taxes from
small businesses, so you’ll have to research your state’s policies before you
complete this step. Here are some examples of common requirements:
Federal taxes
Social Security
State taxes
Local taxes
Medicare
401(k) contributions
Workers’ compensation contributions
Other benefits
Step 6: Calculate net pay, and pay your
employees.
Subtract
each employee’s deductions from their gross pay. The amount left over is the
employee’s net pay, or take-home pay. This is the amount you’ll pay each
employee. You’ll have to hold the deductions and pay them with your payroll
taxes each month or quarter, depending on the schedule you establish.
Once
you’ve established each employee’s net pay, you can pay them on their scheduled
payday. Here are some examples of ways to pay your employees:
Paper checks mailed to their home or distributed at
the office
Direct deposit to their bank accounts
Prepaid cards that
are loaded with their take-home pay
Mobile wallet into which you can deposit your
employees’ pay
Cash (although this method requires more detailed
recordkeeping and might be a safety concern)
Step 7: Keep payroll records, and make any
necessary corrections.
As you process payroll, it’s important to keep records
of your transactions for tax and compliance purposes. If an employee
disputes payment or the IRS needs some kind of documentation down the
line, you need to have records at the ready. Especially in the case of an
employee disputing a paycheck, it’s important to maintain records,
including year-to-date payment, so you can sort out any issues that arise.
Step 8: Be mindful
of ongoing considerations.
Keep
in mind that you have to file your business’s taxes quarterly and annually.
It’s important to consult an accountant to
ensure you understand how your payroll taxes fit into this aspect of your
operations. You’ll also have to report any new hires to the IRS. When you work
with a payroll solution or an accountant, this usually isn’t your
responsibility.
Editor’s note: Looking for information on payroll systems? Use
the questionnaire below, and our vendor partners will contact you with the
information you need:
What are unpaid
payroll tax penalties?
It’s
important to ensure that your payroll taxes are paid properly and on time.
Unpaid payroll tax penalties are levied on businesses when they fail to pay
these taxes or don’t pay them on time. You can incur these penalties when you
fail to do any of the following: provide returns to employees, file Form 941 in
a quarter, or remit taxes withheld from employee paychecks for Social Security
or Medicare.
Did You Know?
Not paying your payroll taxes on time, or leaving tax penalties
unpaid, can result in serious financial penalties levied on your business.
Payroll processing
resources
These
resources provide additional support as you start your payroll operations:
If
you partner with an accountant or sign up for payroll software, you don’t have
to complete any of these steps. If you work with an accountant, you can
coordinate with them to ensure your business’s payroll is being processed
properly and on time.
With
payroll software, you just provide relevant employee information and approve
the hours worked. The platform calculates the deductions, gross pay and net pay
automatically. Payroll providers usually have online portals where workers can
log in to view pay stubs and end-of-year tax documents and update their
information. [If you’re interested in a payroll provider, check out
some of our reviews of companies such
as OnPay, Gusto, and Paychex].
Stella Morrison contributed to the writing and research in this
article.
Image
Credit:chainarong06/Shutterstock
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