How to Process Payroll in 8 Easy Steps for 2024

You’ll need to account for these deductions when processing payroll and send money to the correct benefits program. For most small business owners, doing payroll is the worst part of the job. But with these handy tips, paying your employees will be easier, more accurate and more streamlined than ever before. For most small business owners, doing payroll is one of the most confusing, tedious and time-consuming business activities—but it’s also one of the most necessary ones! Problems can lower employee morale, tie up crucial company resources and run even the most successful business into the ground. One way to maintain those records is to track hours manually and ask employees to write down when they clock in and out.

Regardless of your method, make sure to back these up regularly and test your backups to ensure they’re working properly. Payroll data includes sensitive information like Social Security numbers, bank account details, and home addresses of your employees. Any breach of this data could have serious consequences for your employees and your business. It’s not unusual to hear of occasional complaints about payroll computations. However, frequent incidence is a clear indication of the need to conduct regular audits of the entire payroll process. This is especially true for companies that still use a manual timecard system as they are exposed to high risk for discrepancies.

Payroll software

First, you need to set your company up with the IRS and obtain an EIN. Before you can process your first payroll run, you need to enter the information on your employee’s Form W-4 or Form W-9 into the software system. The process of running payroll with software mirrors the manual payroll method. “After you issue your payroll checks, make sure to remit payroll taxes withheld and accrued to both IRS and state and local agencies. The frequency of those payments is dictated by your total payroll liability amount. Make sure to check with the IRS and your state for those,” says Garcia.

Otherwise, you might try a time-tracking software that holds onto employee timesheet records for you. Either way, you’ll want to train employees to track their time as soon as possible. Before you commit to one system over another, consider factors like business growth, employee benefits, and the complexity of your state’s payroll taxes and laws.

Step seven: Fund payments to your employees and distribute pay stubs

Making an educated decision begins with understanding how to do payroll. Payroll expenses have historically been one of the highest costs to business owners. Fortunately, if you follow these steps, you can reduce your expenses, even if you’re currently overstaffed. As an employer, you will need to make either monthly or semiweekly federal payroll tax deposits. If you make monthly deposits, you must send the federal income tax, Social Security, and Medicare taxes to the government by the 15th day of each month for the previous month. For example, any taxes you owe for the month of July must be deposited by August 15th.

Having a third party handle that could impact your business culture in a way you may not intend. The largest benefit of manual processing is the cost, as you don’t have to buy any software or pay someone else to run payroll. However, if you calculate what your own time is worth and how long it takes to process payroll, you may find that you aren’t saving money.

Things to consider when managing payroll

1. Different employees may have different preferences—some might prefer weekly payments, others biweekly or monthly.
2. Even though it seems pretty easy, you can make a lot of mistakes when paying your workers.
3. That’s why it’s important that businesses learn how to manage payroll effectively, as it directly affects their financial health.
4. You’ll need to withhold tax amounts and forward the totals at the appropriate time.
5. If full-time payroll staff won’t fit in your budget, consider hiring a freelancer or simply delegating the task to one of your most skilled and trusted employees.

However, employers are obligated to pay this tax if they pay more than $1,500 during one quarter to employees. There is also a State Unemployment Tax (SUTA) for employers with at least one employee for 20 weeks during the calendar year. Next, it’s time to subtract payroll deductions and file them with the local authorities. Employees will require different deductions depending on their pay frequency, withholding allowances, and benefit entitlements. Employers have many options at their disposal, ranging from basic payroll software to full-service payroll and outsourcing.

These forms summarize each individual’s earnings and tax deductions for the year and need to be sent out by Jan. 31. Notate on the spreadsheet the total gross wages and overtime wages earned for each employee. Before you can start putting employees on payroll, you will need an Employer Identification Number (EIN). Just like your Social Security number (SSN) is to you as an individual, your EIN is a way to identify your small business for tax purposes.

This means that you need every employee to complete a Form W-4 that documents filing status and records their personal allowances. Once this is in place, you’re ready to start collecting the historical cost principle and business accounting employee information. For example, stock options or different types of discounts you offer your employees are also taxable, and therefore, you need to report them to the IRS. Proper record keeping will protect you legally and allow you to see the improvements or deteriorations in all the aspects related to your business. From business transactions and changes implemented to payroll, you need a record of it all.