When dealing with something as complex and time-consuming as payroll, it is best to develop a systematic approach. It is virtual for all companies that hire employees and must be completed for tax purposes. Although it isn’t the most fun aspect of owning a business, it is a necessary aspect. Nevertheless, if you follow the steps and ensure you keep good records, there is no reason that you process your payroll in a timely and efficient manner.
Consider If You Want To Do It All Manually
You should consider this as a first step, since manual payroll processing can be laborious and error-prone. Investing in payroll software that automates some of the more complex and repetitive tasks may be a good idea to free up more of your time to focus on the profitable side of your business. If you want to learn more about these types of software, there is lots of information online, but the main advantages they possess include making your life far more straightforward. They will often plug into exciting accounting software, which will give you an even more complete picture of your incomings and outgoings. If you have in-house accountants, this software can free up a lot of their time to focus on other aspects of your business. Nevertheless, if you still want to process payroll the old-fashioned way, you can follow the steps below.
Make Sure That You Have Your Employer Identification Number (EIN)
If your business doesn’t already have an EIN, you should apply for one via the IRS website. You must have one if you hire employees, as it allows the IRS to monitor what you are paying and everything’s in order.
Collect Relevant Information About Employee Taxes
Before you can begin paying the correct amounts, you must ensure that your employees fill out the relevant tax forms. This is non-negotiable, and you must give them a deadline to fill them out. If they don’t do this, you will be unable to calculate their net pay correctly. Existing employees will need to fill out a w-4 form, and all new staff members must fill out an I-9. Along with these Federal-specific forms, you might also need your employees to fill out state tax forms. You need to research this part yourself since it varies from state to state.
Schedule Your Payroll
All of your employees should be notified of your salary payment schedule. Each state will specify a minimum, but you can pay faster if you wish. For instance, one state may require that you pay all employees at least biweekly. If this is the case, you can still decide to pay them daily or weekly if you want, but you will be unable to pay them monthly. It works in a similar way to the federal minimum wage. If you wish to pay more, you can, but you cannot pay less. You can make things simple here and ensure that all staff, no matter their seniority, get paid on the same date.
Make A Gross Salary Calculation
Once you have received all pertinent information from your staff, you can perform calculations to arrive at their gross pay. This is their salary before taxes and other deductibles. In essence, this will be everything that they have earned over the amount of time they have worked, including all overtime.
Calculate The Deductions For Each Employee
Most deductibles will be similar, but there may be discrepancies relating to individual employees. These deductibles will be ascertained from the W-4 forms they filled in. You will use this to calculate the net pay they will receive. Some of the more common deductions that pertain to most businesses include:
- Federal taxes
- Social Security
- State taxes
- Local taxes
- Workers’ compensation contributions
- 401(k) contributions
Pay Your Employees Based On Net Pay
The net payment will be their total gross income minus all of the applicable deductibles. This is more commonly referred to as “take-home pay.” Once you have calculated each employee’s final net salary, you can pay them according to your payment schedule and method. In the interests of preserving simplicity, you should ensure that each employee is compensated in the same way. If this is via a payroll check, then all should receive it this way. Likewise, if it is via bank transfer, then they should get it via their bank. Payroll is complicated enough, and you don’t want to confuse things if you don’t need to.
Payroll is only as complicated as you make it. It is possible to pay your employees promptly and stay in compliance with income tax laws if you utilize software or a set of steps to follow. As long as your employees are honest on their W-4 forms and your calculations are correct, you won’t have to worry.