What Are the Steps in The Payroll Process?

When it comes to processing a company’s payroll, it’s always best to invest in good payroll services. Getting help from a dedicated payroll provider will surely ensure proper payroll management. In fact, it is more practical.

However, instead of outsourcing payroll, it is also possible to process independently. Many small businesses process it manually to save money. If you also want to process payroll manually, you need to follow a few steps. 

The payroll processing can be complicated depending on the size of your business. Besides, payroll processing requires precision. You need to be an expert in payroll processing and tax law. If not, you may have problems with the IRS. 

If you are processing payroll for the first time, you’re probably a bit overwhelmed. Don’t worry; this guide will make the process easier than you could expect. We will provide some practical steps for payroll processing. Before that, it is crucial to know some basics.

What is Payroll Processing?

Payroll processing is the procedure of managing the payments of the employee at the end of a payroll period. The process involves everything, from recording an employee in the payroll software to ensuring their paychecks.

Payroll processing includes multiple steps to make sure pay is calculated, tracked, and distributed appropriately. Also, the right amount has been withheld for taxes, company benefits, and other deductions.

In the case of small businesses, the company owner mainly handles the payroll processing. When it gets larger, payroll processing takes time. Most companies hand off this task to an HR manager or an accountant.

Some business owners process it through payroll accounting software. It ensures payroll agreements with state and federal laws. While processing payroll, there are several taxes to consider. Hence, it is better to get professional help.

What are the Steps in the Payroll Process? – Basic Steps

If you have experience in payroll processing, take the following steps as a quick reminder. 

Before you start calculating pay;

  • Gather Employer Identification Number (EIN)
  • Create state or local tax IDs
  • Collect employee tax and financial information
  • Establish a payroll schedule – 
    • choose the correct payroll schedule
    • create tax payment dates

If you are processing payroll manually, 

  • Review the hourly schedules of employee
  • Determine overtime pay
  • Calculate gross pay
  • Calculate net pay
  • Determine deductions
  • Pay employees through the delivery method of their choice

How to Process Payroll – step by step guide

Payroll processing isn’t just a matter of paying employees; it is also a part of conducting business legally. You need to follow the steps below while establishing a payroll process. 

Step 1: Choose a Payroll System

Payroll processing can be done in three ways; Manually, outsourcing, and using payroll software. Manual payroll is managed by humans using paper or a spreadsheet.

In outsourced payroll, a person is hired to manage payroll taxes and bookkeeping. Payroll software can be different by plan or product. Most software offers basic payroll assistance to time-tracking or even HR services.

Step 2: Create Employer Identification Number (EIN)

The following step in processing payroll is establishing your EIN. Then, establish your state and local tax IDs. These identifications are essential to prove that your company is fulfilling the government requirements.

Get the EIN from the IRS website and visit your state and municipality for state and local IDs.

Step 3: Gather Related Employee Tax Information

Then, your employees must fill in several tax forms, including W-4 and I-9 (for new employees). So you can explain payment and other tax details.

Depending on where your business is being conducted, you may need to provide various state and local forms. 

Before you process an employee’s first paycheck, make sure you have the following documents in hand;

  • Job application
  • Deductions
  • Wage Garnishments

Step 4: Choose a Payroll Schedule for your Business

Choose a payroll schedule suitable for your business with the above information in hand. Monthly, semimonthly, biweekly, and weekly are the four main payroll schedules. Understand each plan before you decide on one.

Choose a schedule and maintain a calendar with paydays. Note down the days when you need to pay your employees to get their paycheck on those due days.

Step 5: Calculate Gross Pay

Now that you have chosen a payroll schedule, you are ready to start with payroll processing. To do so, you need to calculate each employee’s gross pay. Gross pay is the total number of hours an employee works in a given time x their hourly rate.

Calculate the number of hours a worker has worked, including overtime hours. You should pay the overtime hours at a higher rate. Generally, you have to pay time and a half for overtime hours. 

Here is an example of gross pay calculation.

  • An employee has worked 50 hours a week for $10/hour.
  • 40 hours’ x $10/hour = $400
  • 10 hours’ x $15/hour = $150
  • Total Gross pay = $550

Step 6: Determine Deductions

Collect the following information from your employee to determine deductions;

  • W-4’s
  • Federal and state requirements
  • Insurance requirements
  • Benefits requirements

Step 7: Calculate Net Pay

To calculate net pay, deduct an employee’s deductions from their gross pay. The amount left is the net pay or take-home pay. You need to pay this amount to the employee.

Step 8: Pay your Employees

Once you’ve determined each employee’s net pay, it’s time to pay your employees. You can consider paying them on their scheduled payday. Here are some ways you can pay your employees

  • Distribute paper checks at the office or mail to their home
  • Deposit to their bank accounts
  • Load their prepaid cards with net pay amount
  • Mobile wallet
  • Cash

Things to Keep in Mind after Each Pay Period

  • Keep Payroll Records

After each payroll period, keep records on the transactions for tax and agreement purposes. If the IRS asks for any documentation or a worker disputes a paycheck, you need the records.

  • Be Aware of Ongoing Concerns

Note that you have to file the taxes of your business quarterly or annually. Consult an accountant or payroll provider to understand how your payroll taxes fit your business operations. Also, you have to report any new recruits to the IRS.

Final Words

See, processing payroll is as easy as winking. The process may take a few hours, depending on the number of employees and the resources you use. The manual process may take longer than automated payroll and time-tracking tools.

However, taking help from a payroll provider can assist you in automating the payroll and time tracking process. It saves time, enhances efficiency, and lessens agreement risk. Let a good HR and payroll service manage all payroll issues. So you can focus on your business strategy.