No matter the size of your business, it is important to do payroll right. However, payroll processing can be a challenging task even for those with experience. That is because the laws are constantly changing when it comes to processing payrolls and making sure the payroll meets various tax standards. So to help you out, we are going to break down the steps required and answer the question, how does payroll work? After reading this, hopefully you will be well on your way to doing your payroll for your business. Here are the main steps for how to do payroll.
When it comes down to it, the payroll process only has three main steps. We are going to look at each one in detail, but before doing that we are going to list them out here in case you want to jump to a particular one. The three steps are as follows:
- Preparation
- Paying Employees
- Post Payment
1. Preparations
You may be surprised that processing payroll is only three steps since it can often seem so complicated. However, if you do the first step of preparation right, then the rest should come easily.
Preparation is key in most tasks when it comes to a business, and payroll is no different. The first thing you need to do for preparation is to know your responsibilities as an employer. You need to know what documents you have to collect, what accounting system you are going to use, and all the other basic information. If you do these things as you go, by the time payday comes around you won’t feel so overwhelmed.
Some of the other decisions you have to make are who is hourly, and who is salaried, how often are you going to pay employees, how will you handle over time, how are employees going to log time and how will you deal with paid time off.
Once you know all this, it is time to start gathering paperwork. For every employee, there are certain forms to fill out. When hiring an employee there is an onboarding step. You, as the employer, are responsible for making sure all the proper forms get completed and filled out correctly. The forms that have to be filled out are:
- A W-4 form for the IRS to tell withholdings
- An application form to show their intent to work for your company
- An I-9 to show that the person can legally work for you
- State and local tax election documents
If all of these forms are not completed and submitted, then your company can get fined.
Setting up direct deposit is the next step in the preparation process. There is also another form that the new employee has to fill out for this. Your specific bank can give you information on how to set it up. It is important to have a separate bank account for payroll as a business. You can also link the account to your accounting software to show when people were paid and keep track of it. A separate payroll account is also important since you withhold some of your works pay for the government and that way you will have it ready to send in.
2. Paying Employees
Now that you have all the preparation done, you can move on to paying your employees. This step is fairly easy if you have done your preparation well. That is because you already know how you are determining your employees pay and when you are paying them.
When a pay period ends, all you have to do is calculate how much your employee has earned. You determine the gross pay of the person first. That is the amount you owe them based on how much they worked and their rate. Once you have the gross pay amount, you have to calculate various payroll tax withholdings and deductions.
The first withholding you should calculate is the income tax withholding for federal, state, and local. You take gross pay and multiply it by the relevant percentage, and then remove that amount of money from the gross pay. You then do the same to calculate the FICA withholdings and any health care or retirement deductions. Once you have all the withholdings and deductions made, you now know the employee’s net pay. This is the amount that the direct deposit or check will be for.
If you use a service such as Check Stub Maker to create your paystubs, these calculations can all be done for you with the built-in calculator, and you do not have to worry about the extra math.
3. Post Payment
Once you pay the employee with a check or direct deposit you have to make payroll tax deposits and a report. You will need all employees gross pay, tax withholdings, FICA taxes, and other deductions. You take the tax withholding money and FICA money and make a payroll tax deposit. Depending on the size of the company is how often you have to do it. You can use form 8109 or do it online using the IRS EFTPS system. You also have to make these deposits to your state and local agencies.
On top of this, you have to make regular payroll tax reports. You do this quarterly on Form 941. The report shows your payroll tax liability and how much you paid. Annually you have to do an unemployment tax report on Form 940. This shows how much you contributed to unemployment. You also may have other forms to fill out based on your state.
After doing these reports, another thing you have to do is create a payroll registry. This registry is where you record and keep track of all payroll information. Most programs will be able to create this payroll registry for you. If you hire someone to do your payroll, then they will do this for you, as well. Lastly, you want to keep track of when you carry out all of your reports. That is why it is a good idea to use a payroll tax calendar. This way you don’t forget to do a form.
So, now you know the basics on how to do payroll. Hopefully this process will help you get your payroll done efficiently and keep running your business successfully. If you have a small business with a few employees, then doing your payroll will often not be as hard as it seems, with the right tools and proper preparation. One of those tools is Check Stub Maker’s pay stub generator, so get started and see how you can streamline your business today.