It’s best to work with an accountant or invest in payroll services to avoid the administrative and tax burdens. Many small businesses choose to outsource payroll to save money despite the many benefits.
There are some steps to follow if you want to process payroll manually. This can be a complicated process, depending on the size and type of your company. If you are not an expert on payroll and tax laws, you may have issues with the IRS.
This guide provides you with a few steps to follow when processing payroll. However, you must consult a professional accountant or payroll specialist in order to make sure you are compliant with all state and federal employment and tax requirements. This guide provides a basic overview as well as a step-by-step, more detailed process for manually processing your company’s pay.
What is payroll processing?
Paying your employees is the process of paying them for their hard work. Calculating total wages, filing taxes, and compensating your employees are all part of the payroll processing process. Payroll processing refers to the process of paying employees at the end of a pay period. The process is complex and involves many steps in order to make sure that employees are paid correctly, that their pay is tracked, and that they receive the correct amount of tax, benefits, and other deductions. A payroll specialist can manage payroll, or it may fall under human resources.
Basic steps for payroll processing
Consider these steps as a road map for your payroll. This first set of steps is a great resource for those who have experience with payroll and want to refresh their memory. For a more in-depth guide, scroll down to view a more detailed one.
Manually process payroll by following these steps:
Examine the employee’s hourly schedules.
Pay employees using their preferred method of payment (e.g., paper check, direct debit).
Remember these points after every pay period:
The basic steps in processing payroll are collecting information about employees, creating a schedule for payroll, tracking the time worked and money due, making payments, and maintaining accurate records.
Establish your employer identification number
Establishing your EIN and state and local tax identification numbers is the first step to processing payroll. The government uses these identifications to ensure that you meet all requirements and track your payroll taxes.
You can create an EIN on the IRS website if you don’t have or don’t know your EIN. You’ll need to contact your state or municipality for your local and state tax IDs. Looking for the best reviews of payroll systems for your small business? We can help! ]
Gather relevant information about employee taxes
Your employees will need to complete various tax forms before you begin processing payroll. This is so that you can accurately account for allowances and other tax details. The W-4 form and I-9 are two of the forms you will need to fill out. You will need to submit a variety of state and local forms, depending on the location where you operate your business.
It would be best if you had the following documents ready before processing an employee’s initial paycheck.
Job Application: This document is useful even if an employee has never submitted a formal job application. It ensures that the key information about payroll is all in one place.
Deductions Employees may be eligible for company benefits such as health insurance or retirement plans. The correct amounts are deducted from each pay period by proper payroll processing.
Wage garnishments If your employees owe you money (such as IRS payments or child maintenance), you may be required to garnish their wages by law. The court orders wage garnishments. Make sure you have all the necessary documentation in your possession and on file.
Select a schedule for payroll
Once you have all the information you need to create payroll, you will be able to choose a schedule that is most suitable for your business. There are four basic schedules: weekly, biweekly, and semimonthly. Before deciding on the best plan for your company, it’s crucial to understand each one fully. Set up a calendar that shows paydays and note the dates when you will need to process payroll so your employees can get their pay on those days.
Include important dates such as holidays, quarterly tax dates, and the annual filing date. Remember that this will need to be done at the beginning of each year. It’s important to determine the preferred method of delivery for each employee. Many businesses let employees select between paper checks and direct deposits.
Calculate gross pay
Once you have created a schedule for your payroll, you can begin processing the first pay. It would be best if you first calculated the gross income of each employee, which is equal to their total hours worked in a pay period multiplied by their hourly rate.
Calculate the hours worked by an employee in a pay period and note overtime. The overtime must be paid at a rate that is in line with federal laws. You’ll need to pay overtime if an hourly employee works more than 40 hours a week.
Calculate the deductions for each employee
To determine the deductions for each employee, gather information from your employees’ W-4s and federal and state requirements. Also, consider insurance and benefit requirements. It can be complicated. Each state has different policies for collecting taxes from small business owners, so it’s important to do your research before you finish this step. These are some common requirements.