You can’t keep up with the demands of your business on your own anymore. The next logical step is to start looking for employees to hire. However, doing so increases the difficulty of running a business, which in turn alters how much time you must devote to it. Payroll will be a major new duty and time commitment for you.
Payroll is defined. This is a concept that not all new business owners will be familiar with, so it’s best to lay the groundwork by providing a quick explanation. Payroll is the systematized method of tracking employee earnings, deducting and remitting payroll taxes, disbursing paychecks to workers, and recording all of these activities.
Eleven Steps to Accurate Payroll Processing
Understanding payroll can be challenging because it encompasses so many different areas, from payroll laws and taxes to paperwork. Mistakes are common when handling payroll for the first time. Don’t forget that mistakes in payroll or taxes can have serious consequences.
Even sole proprietors should put money into a reliable system for handling payroll. We recommend payroll software instead of doing payroll manually. Payroll processing services handle everything from employee payment to payroll tax calculation to payment and filing to employee benefits administration.
Payroll processing follows a fairly consistent sequence of steps regardless of the software used. Here is a simple breakdown of how to use payroll software to handle the payroll for your small business. The steps involved in setting up Square Payroll will be illustrated with screenshots.
First, find a payroll program that works for you.
Selecting efficient payroll software is the primary responsibility at hand. You have many options, but if you’re not familiar with payroll, it can be difficult to determine which one is best.
Furthermore, some subpar payroll service providers run persistent ad campaigns, and if you aren’t well-informed, you might end up subscribing to them. We’ve done the legwork for you and compiled a list of the top-rated payroll systems for various business sizes and types to make your life easier. The three best options are listed below.
Gusto is an intuitive platform that streamlines HR, payroll, benefits management, and compliance for companies of any size. It was developed specifically with small businesses in mind. The program provides a number of payroll tools to streamline and computerize the entire payroll procedure. Additionally, HR services are included in premium plans to help you and your staff make the most of your time together. To learn more about Gusto, check out our in-depth review.
A Payroll System That Squares the Circle
Square Payroll is user-friendly payroll software because of its straightforward interface and central location of all features. Payroll management is simplified with features like automatic tax filing, electronic timecard import, and more. See if Square Payroll meets your requirements by reading our review.
Middle-sized companies can benefit greatly from Rippling, a premium payroll service. It’s great for managing employees because it has HR features and advanced payroll tools. A large number of other applications can be integrated with Rippling, including time and attendance tracking systems, payroll systems, and accounting software.
Second, create an account for the business in the payroll system.
The Third Step: Including Employees in the Payroll System
You can start adding staff by entering their full names, email addresses, and job titles. You can skip the technical explanations because the program will take care of everything automatically. Inputting an employee’s name and email address into the software will trigger a notification to be sent to that person, who will then be able to finish the process on their own time.
To process contractor payroll, the payroll software will ask the contractor to fill out various tax forms, such as a W-4, I-9, or 1099, depending on the nature of their employment. In the absence of payroll software, you’ll be responsible for compiling this data and handling the associated administrative tasks manually.
When employees submit their completed forms to the payroll system, it uses this data to determine who is exempt from overtime pay, who is not, and how much tax and benefit money each employee is owed.
Four: Fill Out Tax Data
Here is where you’ll provide the payroll software with the information it needs to file payroll taxes on your behalf, such as the business’s Employer Identification Number (EIN) and state tax IDs. If you are an employer and do not have an EIN already, you can apply for one on the IRS website for no cost.
EINs, or federal tax ID numbers, are used by the IRS and other government agencies to uniquely identify and track down businesses. It functions similarly to a social security number and is required whenever payroll taxes are being reported.
Verify whether you need a state income tax ID or state unemployment ID from your local or state government. You can get by with just your EIN in most states, but you should double-check just to be safe. The next step is to create your employer profile in the payroll software once you have gathered all the necessary data.
Fifth: choose a pay cycle and a method of payment.
After creating a profile in payroll software, you’ll need to establish a payroll schedule and choose a payment method. As far as payroll goes, you can choose from four different formats. Schedules on a weekly, biweekly, semimonthly, or monthly basis fall under this category. But keep in mind that the minimum number of days between paychecks varies by state.
For instance, depending on the industry, your state may mandate weekly or biweekly pay periods. Make sure you’re in accordance with the laws of your state regarding paydays by looking them up online.
It is required by law in some countries and jurisdictions to provide employees with a number of different payment methods. Direct deposit, which is more convenient for both the employer and the employee, is gradually replacing paper checks as the most common method of disbursing wages to workers. Prepaid payroll cards are another viable option, functioning similarly to prepaid credit cards.
The Sixth Step: Set Up a Time-Tracking System
To keep tabs on how much time each employee puts in, you need a reliable timekeeping system. Employers are required by the Fair Labor Standards Act to keep accurate time records for their hourly workers. Spreadsheets are a straightforward option, but for more complex needs, time tracking software is the way to go.
In order to keep track of time worked, employees can use a clocking system to sign in and out. Syncing the timekeeping app with your payroll system allows for instant import of the accumulated hours worked. In addition to that, concerns like counting overtime hours have been eliminated.
Method 7: Process Payroll
Running payroll for a specific pay period is an option provided by most payroll programs once you’re ready to pay your employees. It’s easy to pay employees by clicking a button after verifying their details.
Phase 8: Enter Work Hours or Import Timecards
To calculate payroll, you can either manually enter or import employee hours worked from your time tracking system. Keep in mind that the latter is the more time and effort saving option for paying your employees properly.
When timecards are imported, the hours worked by each employee are added in a timely fashion. Employees’ overtime and double-overtime hours are recorded accurately as well. Keep in mind that you can always go in and make changes to these times manually.
Once you’ve done that, you can factor in any supplementary payments, such as cash tips or paycheck bonuses. This data is used by the payroll program to compute each worker’s gross pay.
Adjustments and Deductions (Step 9)
Payroll taxes may be the most time-consuming and complex aspect of processing paychecks. There are a number of factors that contribute to this complexity. The total payroll tax liability for a business includes the employer’s share and the employees’ contributions. Income taxes and other payroll taxes are required to be withheld from employee paychecks and paid by the employer on the employee’s behalf.
The term “federal tax” refers to taxes collected at the national level, such as the income tax and the unemployment insurance tax. It’s also important to keep tabs on and remit any Medicare or Social Security deductions required by the Federal Insurance Contributions Act (FICA). Taxes at the state level, such as income tax and unemployment insurance contributions, are also due.
The payroll system manages all of this automatically. Taxes are automatically calculated, relieving you of that burden. It’s important to check if there are any alterations you’d like to make to the paychecks of your employees. Here is the time to do things like comply with a garnishment order or take a deduction after taxes have already been paid.
Pay your employees and review the payroll run summary.
Finally, the payroll software will direct you to a review page where you can see all of the payroll taxes and other deductions that have been taken out of each employee’s paycheck. When you’re ready to pay your staff, just confirm the withdrawal after a final review.
If you decide to pay your employees by direct deposit, keep in mind that it may take two to four business days for the funds to show up in their accounts. Employees may have to wait longer for payments made through alternate methods.
Employees have access to pay stubs detailing each pay period’s earnings and deductions. This is an extra worry, but if you use payroll software, you won’t have to worry about it.
Step 11: Maintain Your Payroll Documents
In order to comply with legal requirements, it is necessary to keep some of the paperwork created by the payroll process. One of the most common mistakes new employers make with payroll is not securing this paperwork. Payroll tax records and other related documents must be kept for a minimum of four years.
Details found in these files consist of:
Number assigned to you by your employer
A complete accounting of all employee compensation, including dates and amounts
The Reported Tips
The equivalent monetary value of services or goods provided in lieu of cash payment
Employees’ names, SSNs, and positions must be recorded accurately.
When you started working there and when you left
Whether you’re sick, on vacation, or both, you deserve compensation.
Employee W-4 form photocopies
Payroll tax deposit records
Documentation of tax returns
Formal documentation of perks
Payroll records are a vital part of being transparent and avoiding legal issues. Easy payroll auditing is another benefit.
Moreover, various kinds of businesses might have varying needs. Payroll deductions and other tax documents may necessitate the maintenance of additional records. The duties of recordkeeping and reporting that fall on employers extend beyond the basics. Among these is making sure the appropriate state agency is notified whenever a new employee is hired.
The Question: Should You Handle Payroll Yourself?
It can be difficult for business owners to take the time to process payroll on their own because of the many other demands placed on their time. In spite of this, trusting a payroll service with one of a company’s largest outlays can be a nerve-wracking experience.
As you may have noticed in the preceding steps, however, processing payroll can be a complicated and time-consuming endeavor, involving a number of different elements and a wide range of requirements. Payroll processing is not like other administrative tasks that can be done on the side. It is highly technical and demands one’s undivided attention.
The question of whether to employ an in-house accountant to handle payroll will inevitably arise. While this may be unrealistic for smaller groups, it’s something that larger companies should consider. If you don’t think your company is ready to hire an accountant, investing in payroll processing software is a good alternative.
A working knowledge of federal and state payroll regulations is required.
Payroll laws vary by state and federal jurisdiction; if you’re handling payroll on your own, it’s your responsibility to ensure you’re in accordance with all of them. The rules for final paychecks, paid time off, and worker’s compensation all fall under this category.
Developing your company is one of your top priorities as a business owner. Why waste time slacking off to study rules and regulations? You can avoid worrying about complying with payroll laws by using automated software. These payroll services automatically comply with federal and state laws, so there’s no need for you to study them.