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Payroll is a necessary part of managing a business, but it can be overwhelming and difficult to manage. Here’s how to do payroll yourself in 8 easy steps.
When people think about payroll, they automatically think of numbers. Although mathematics is required, understanding the entire process is required to learn how to handle payroll. Payroll management entails everything from registering your company as an employer to paying your workers, tax authorities, and other relevant parties.
Step 1: Register your company as an employer.
Assuming you’ve previously formed your company and obtained the necessary permits, the first step in processing payroll is to ensure that your company complies with all legal requirements for operating as an employer. Pay attention to any industry-specific payroll regulations you may be required to observe.
- Request a federal employer identification number (EIN)
- Check to see whether your state tax identification number matches your federal one; if it doesn’t, see if you need to apply for one or if one is given to you automatically.
- To use the Electronic Federal Transfer System, you must first create an account.
- Create a separate bank account for payroll transactions (separate from your main business account)
- Sign up for any state-specific electronic tax payment accounts that are available.
- Worker’s compensation insurance is required in most states.
Step 2: Set Up Your Payroll System
You’ll now have to make certain choices that will affect how you handle payroll each month. You’ll have to put in some effort to figure out what will work best for your company. Investigate the “why” underlying each topic. Then, in addition to any legal payroll obligations, evaluate the needs of both your workers and your company.
- Will you be paying weekly, bimonthly, or semimonthly?
- Full-time vs. part-time workers (not contractors): which will you have? What is the difference between exempt and nonexempt employees?
- Will you need to keep track of your work hours? If so, how will you go about it, and when will you need to know about it?
- Will you be providing any benefits? Who will foot the bill? How will you handle payroll deductions if workers are paying for them in part or in full?
- Taxes: How frequently will you have to pay taxes, and which ones will you be responsible for? Will you be subject to state taxes? Local? Determine the rates ahead of time so you know how much to set aside.
- Payroll processing and calculations: Will you use Excel, a calculator, or payroll service to compute and handle payroll?
- Will you be writing checks or using direct deposit for your paychecks? Do you accept credit cards? Cash?
Consider if you want to utilize a payroll solution to make the process go more smoothly; the appropriate supplier may be the difference between spending three days on payroll vs one hour.
Step 3: Collect Employee pay stubs.
You’ll need to gather some essential payroll papers once your employee is ready to start working. These contain tax and work permission papers, both of which must be signed by the workers.
If you have an HR or payroll system, you’ll need the information on the forms below to add the employee to it. It’s a good idea to keep track of this data in a paper or electronic personnel file.
W-4 form (federal)
A W-4 is a federal tax withholding form that specifies the tax rate to apply to an employee. For tax withholding, get a signed Federal W-4 form. You don’t have to send this to the IRS, but it should be kept in a paper file or an electronic personnel file.
W-4 for the state (or equivalent)
The state tax withholding paperwork is identical to the federal one, but your state may refer to it by a different name. Gather a signed State W-4 form for tax withholding and save it in a paper or electronic personnel file.
I-9 Form
Within three days of the employee’s start date, collect a signed I-9 Form for work eligibility verification. With a passport or two pieces of identification, you’ll want to make sure the person can prove their identity and ability to work in the United States.
Additional Payroll Forms
Utilize a voided check to get direct deposit information from workers (if applicable).
You’ll also need to enroll your new hire in your state’s New Hire Reporting Program (within 20 days). Ensure that all new or rehired workers are reported to your state. These reports are often filed automatically by payroll software such as Gusto. The last three stages will be part of your normal payroll process, as opposed to the first three, which must be completed just once.
Step 4: Collect, review, and approve timesheets
You’re now ready to begin gathering information on your workers’ working hours in order to calculate how much you should pay them. If you pay hourly workers, you’ll need to figure out how many hours they worked throughout the course of the time. Salaried workers are usually paid the same amount each pay period, but you may still monitor their work hours for visibility if necessary.
Counting up the hours worked is as easy as having the employee write down their start and finish timings each day on a piece of paper. The total does not include lunch breaks.
The majority of companies begin with a basic timesheet. To handle staff schedules, break time, and hours worked, they often upgrade to a time and attendance system or time clock as companies expand.
Step 5: Compute the Payroll
You may begin calculating the key payroll calculations after you know how much an employee worked for the pay period. This comprises gross pay, taxes payable, insurance premiums and other benefits deducted, as well as final net pay.
Gross Pay
Adding up the straight time hours (up to 40 hours per week) and multiplying by the employee’s hourly rate is all it takes to figure out gross compensation. Then, sum up the overtime hours worked during the pay period and divide by the overtime pay rate of the workers. Overtime is computed at 1.5 times the normal rate of pay, whereas straight time is paid at the employee’s regular rate of pay.
Taxes and Payroll Deductions
When it comes to payroll, you need to know what payroll deductions you’ll be making ahead of time. Federal and state payroll taxes (make sure you know the rates), perks you may provide, and things like unemployment insurance or Social Security are all examples of deductions.
Here’s a rundown of possible deductions, along with links to additional information, such as how to figure out how much you deduct for each employee. Deductions are handled automatically if you utilize payroll software like Gusto.
Here are several examples:
- Social Security and Medicare are two government-funded programs (FICA)
- Unemployment insurance is a levy imposed by the federal government (FUTA)
- Deductions for benefits you provide to your workers, such as health insurance
- Employee tip deductions.
- Uniform cost, for example, is a miscellaneous deduction.
Add up all of the deductions for each employee to obtain a total, then remove that amount from the employee’s gross pay to process those deductions. Alternatively, you may write each deduction as a line item and deduct them from the employee’s gross pay one by one until you arrive at a net pay figure.
If you’re having trouble with the numbers side of payroll, check out our article on payroll calculations. Just make sure you understand the basic procedures you’ll need to follow to handle payroll.
Step 6. Pay Employees, Tax Agencies, and Benefits Providers
You’ll know the net pay amount you need to pay each employee after you remove deductions from gross pay, which includes totals for employment taxes and benefits. Make sure you stick to the compensation plan you established at the start so that workers know what to anticipate (if you committed to paying wages every Friday, give yourself enough time in advance to process).
Taxes and benefit providers both have deadlines. Many companies are obliged to pay these costs on a monthly basis, although this is not always the case. In addition to whatever employer payroll tax and premium amount your company pays, you’ll have to pay back the amounts you withheld from your workers’ paychecks.
Always check to see whether you have adequate money in your payroll bank account before making any payments. Spending more money than you have may result in costs and lawsuits that are unwarranted.
Step 7: Finish Payroll Tax Reports for the Year
You’ll need to be ready to issue year-end payroll tax reports as the end of the year approaches. Employees must get their W-2 forms by January 31 of the following year, and the forms must include their total earnings as well as the taxes they paid. If you’re paying freelancers, you’ll need to fill out 1099 forms instead, which will indicate profits but no taxes.
Step 8: Organize and Document Your Payroll Records
You’ll need to keep track of certain data for each pay period to stay in compliance with federal labor regulations. Payroll records, such as timecards, pay stubs, and any other information on pay increases, should be kept.
The papers are already available or maybe submitted and linked to the employee record if you’re using software like Gusto. If you’re manually managing papers, you’ll want to make sure they’re safe.
Conclusion
It may be difficult to learn how to handle payroll. You must ensure that your company is registered with all of the appropriate authorities. On a tight timeline, you’ll need to fill out paperwork for each employee and buy workers’ compensation insurance (less than 20 days for most states by law). The intricacies of payroll compliance may confound even the most experienced company owners. As a result, basic software solutions are the most cost-effective and time-saving choices for company owners.
