How to Process Payroll

How to Process Payrollchainarong06/Shutterstock / Credit chainarong06/Shutterstock When it comes to processing payroll, investing in a payroll system or working with an accountant is usually the best choice. There are endless administrative and tax-related responsibilities involved with payroll that can make it a real chore. According to the pitch from major payroll providers, youre better off spending time working on growing your geschftsleben than processing payroll. Yet, many small businesses process their own payroll.If youre interested in processing payroll manually and saving a few dollars each month in payroll solution fees, there are a few steps you need to take. Keep in mind that, depending on the size of your business, this can be a very complicated process.If youre bedrngnis already an expert in payroll and tax law, you could run into issues with the IRS. While this guide will provide you with some act ionable steps, you should consult an accountant or payroll professional to ensure youre compliant with state and federal tax and employment requirements. This guide includes a basic overview and then a more detailed, step-by-step process for manually completing your companys payroll.Editors note Looking for information on payroll systems? Use the questionnaire below,and our vendor partners will contact you with the information you needBasic payroll processing stepsView these basic steps as a roadmap for your payroll process. There are a lot of details, so it can be easy to get lost in the minutiae. If you have payroll experience and need a quick refresher, this first platzdeckchen of steps can be a quick resource. If youre looking for a deeper dive, keep scrolling to the full breakdown below. Theres also a list of resources at the end of this story, so if you need quick insight on something, you can find those links at the bottom of the page.Before you start calculating payGet an em ployee EIN numberEstablish state or local tax IDsCollect employee tax and financial informationW-4 forms1099 forms (if youre employing contract-based workers)Set up a payroll scheduleChoose the right payroll schedule for your businessEstablish tax payment datesHow to manually process payroll Review employee hourly schedulesDetermine overtime payCalculate gross payDetermine deductionsCalculate net payIssue payments to employees through their preferred delivery method paper check, direct deposit, etc.What to keep in mind after each pay period Keep payroll recordsBe aware of potential miscalculations and mistakesYou have to report new hires to the IRSHow to process payrollStep 1 Establish your employer identification numberThe first step you need to take in processing payroll is determining your employer identification number (EIN), and establishing your state and local tax IDs. These identifications will be used by the government to track your businesses payroll taxes and ensure youre meeting requirements. If you dont know your EIN, or dont have one, you can visit the IRS website to set it up. For your state and local tax IDs, youll have to go through your state and municipality. Interested in a payroll system for your small business? Check out our reviews and best picks.Step 2 Collect relevant employee tax informationBefore you start processing payroll, youll have to have your employees fill out various tax forms so you can account for allowances and other tax details. These forms include W-4, I-9 (if it is a new employee) and W-2. There are various state and local forms you will have to provide, but these will hinge on where your business is operating. If you have contract-based employees, youll have to provide 1099s.Step 3 Choose a payroll scheduleOnce you have the relevant tax and legal information to set up payroll, you can choose a schedule that works best for your business. There are four main schedules monthly, semi-monthly, biweekly and weekly. Its impo rtant to understand a full breakdown of 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 days where youll have to process payroll for your workers to get their money on that defined day. Build in important quarterly tax dates, holidays and annual tax filings. Keep in mind youll have to do this at the start of every year. Youll also want to establish the preferred delivery method of each employee. Many businesses offer both paper checks and direct deposit options, for example.Step 4 Calculate gross payNow that youve set a payroll and work schedule, you can start processing your first payroll. To do this, you must calculate each employees gross pay. An employees gross pay is the sum of the number of hours an employee works in a given pay period multiplied by their hourly rate. abflug 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, youll have to pay time and a half, or an employees hourly wage plus half that wage.Heres an example of calculating gross pay.Worker A has worked 50 hours for your weekly pay period and earns $10 per hour.40 hours x $10/hour = $40010 hours x $15/hour (time and a half) = $150Gross pay = $550Step 5 Determine each employees deductionsGather information from your workers W-4s, federal and state requirements, insurance requirements, and benefits requirements to determine each employees deductions. This is where the legwork comes in to processing payroll for your company. Each state is different and takes different taxes from small businesses, so youll have to research your states policies before you complete this step. Heres a basic list of some hypothetical requirementsFederal taxesSocial SecurityState taxesLocal taxesMedicare401(k) contributionsWorkers com pensation contributionOther benefitsStep 6 Calculate net pay and pay your employeesTake each employees gross pay and subtract their deductions from this amount. Whats leftover is the employees net pay, or take home pay. This is what youll have to pay out to each employee via direct deposit or paper check, depending on what your workers prefer and what you can provide. The deductions youll have to hold and pay with your payroll taxes each month or quarter, depending on the schedule you establish.Once youve established each employees net pay, you can pay out your workers on their scheduled payday.Step 7 Keep payroll records and adjust to mistakesAs you process payroll, its important to keep records of your transactions for tax and befolgung 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, its important to maintain records, including ye ar-to-date payment, so you can sort out any issues that arise.Step 8 Other considerationsKeep in mind that you have to file your businesss taxes on a quarterly and annual basis. Its important to consult with an accountant to understand how your payroll taxes fit into this aspect of your operations. Its also important to remember that youll have to report any new hires you make. Working with a payroll solution or an accountant means that this usually isnt your responsibility.ResourcesProcessing payroll manually can be difficult, so these resources can help provide additional support as you start your payroll operations.IRS Withholding CalculatorPayroll steps according to SBAPayroll FAQsEmployer Identification Number lookupEmployer Identification Number applicationState payroll tax breakdownRecordkeeping and reporting guidelinesIRS record-keeping guidelinesUsing payroll servicesIf you partner with an accountant or sign up for payroll software, you wont have to complete any of these st eps. In a payroll solution, youll have to enter relevant employee information and approve hours. The platform will calculate all the deductions, gross pay and net pay automatically. Payroll providers usually have web portals where your workers can log in to view pay stubs, end-of-year tax documents and update their information.If you work with an accountant, you can set up a system with this person to ensure your businesss payroll is being processed properly. Manually processing payroll can be a cumbersome task. Working with a platform can be more convenient for your workers and take the burden off your shoulders. Keep in mind that if you process payroll manually, it will often take multiple days of work to ensure workers get their checks for the right amount on time. With a payroll solution, all you must do is approve hours and click a button. 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