Processing payroll can be a tedious and strenuous process. While many small businesses try to save money by processing their payroll on their own, the numerous details and tasks involved in processing payroll often takes time that may be better allocated towards efforts that grow the business. Also, if you are processing your payroll and not a tax expert you run the risk of having complications with the IRS, which could put your business in jeopardy.
Fortunately, there are steps you can take to ensure you are processing your payroll correctly. In this article, we provide a basic overview of how to process your payroll in a simple 7-step process
1. Establish Your EIN.
The first step in processing payroll involves determining your specific employee identification number (EIN). Your EIN establishes your local and state tax IDs. Likewise, the federal government uses your EIN to track your business’s payroll and to make sure you are meeting all tax requirements, so it is paramount you have one and know what it is. If you run a business and do not have an EIN, or do not remember the number, you can visit the IRS’s website to create or find one. As for your local and state IDs, you have to go through your local municipality and the state to get them.
2. Collect Employee Tax Information (I-9, W-4, W-2, and Local Forms)
Before you can officially start processing payroll, you must have your employees fill out all the legally required tax forms so that you have a report of all your allowances and other tax details. The tax forms your employees must complete are the W-2, and the I-9 and W-4 if they are new employees. In addition, there are various state and local forms you must also provide. However, those forms are contingent upon where you operate, so you may have to do additional research on local tax form requirements. And do not forget, if you have contract-based employees, you must also provide 1099s.
3. Select a Pay Schedule
Now that you have all the necessary legal and tax information to start your payroll, it is time for you to choose a schedule that works best for your business and employees. When it comes to a payroll schedule, there are four main types. These include:
You must have a full understanding of each payroll schedule before you can decide which one works best for your business. For instance, if you are a small startup, it may be better to process payroll semi-monthly or monthly due to the added costs of processing it weekly. When you do decide which payroll method works best for you, create a coherent schedule that illustrates payroll paydays and when employees will get paid. Likewise, write down quarterly tax dates, holidays, and the annual tax filing date. Remember, you have to start a new calendar every year. And lastly, you must establish your preferred delivery method. Most businesses have direct deposit or paper check options.
4. Calculate Gross Pay
Once you have your payroll set up and work schedule complete, you can officially begin to process your payroll. To do it correctly, you have to calculate each of your employee’s gross pay. The gross pay is the number of hours an employee worked in any given payment period multiplied by their hourly rate.
First, calculate the number the employee worked and do not forget to mark overtime hours, which you legally required to pay a higher rate. If someone puts in more than 40 hours per week, you must pay them their standard hourly wage plus one half per each hour of overtime worked. Here is an example of calculating gross pay:
- Tom worked 45 hours in a weekly pay period at $15/hour
- 40 x $15 = $600
- 5 x ($15 x 1.5) = $112.50
- Tom’s gross pay is $712.50
5. Determine Deductions
To determine deductions, you are going to need to gather all of your employees’ W-4 information, state and federal requirements, benefits requirements, and insurance requirements. Compiling deductions is the strenuous part of processing payroll. The tax requirements for small business varies by state, so you must know your state’s policies to complete this part. Here are some requirements you may have to address:
- Social Security
- Federal Taxes
- State Taxes
- Local Taxes
- Medicare/ Other Health Insurance
- Any Other Benefits
6. Calculate Net Pay
To calculate net pay, you take your employee’s gross pay and subtract any deductions they have from it. The leftover amount is net pay, which is the amount you must pay to the employee at the end of the pay period via paper check, direct deposit, or some other payment form. You must pay the deductions you hold each month, or quarter if that is how your business operates, with your payroll taxes. Once you have each employee’s net pay, you can then pay them on their scheduled payday.
7. Keep Payroll Records
As you continue to process payroll, it is important to keep records and to always have them near for reference for tax compliance purposes. If you are ever in a scenario where an employee disputes a payroll claim, or the IRS needs some form of documentation, you want to have your records at the ready. Maintaining records and having a safe place to store them is especially crucial for employees disputing pay, so you can easily sort out any issues that may arise.
Why You May Want to Have Someone to Process Payroll for You
If you process your payroll, you probably already know how time-consuming it can be. Although you can definitely save money by processing your own payroll, be mindful that it doesn’t take too much time away from other important endeavors that help your business grow. If you find that processing payroll is taking up too much time, you may want to hire experts that can streamline the process for you.
Additionally, taxes. Tax laws are constantly changing and sometimes understanding of the current tax requirements can be the difference between success and loss. Having a payroll professional to depend on helps you reduce risks regarding taxes, as they do payroll day-in and day-out.
At Avitus Group, we can handle everything discussed above so that you can stay focused on growing your business while we process the payroll. If you would like to learn more about Avitus Group and how we can help your business, feel free to book a free consultation today!