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How to do payroll

Processing payroll can be done on your own or with the support of software or accounting professionals.

It’s important to make sure you correctly process payroll for your business to avoid legal trouble with state authorities and the IRS. If you have a small business, it may be feasible to do it manually on your own. But you can also access software like Quickbooks or hire an accountant to help you.

How does payroll work?

Every business with employees has to process payroll. Payroll is the process of paying your employees and tracking factors like hours worked and salaries to comply with labor and tax laws. It involves calculating wages, withholding taxes and sending payments to your workers as well as the IRS.

How to do payroll in 7 steps

1. Decide who is processing payroll

There are three main ways to process payroll: You can do it on your own, with the help of automated software or with the aid of an accountant. Processing payroll on your own may be less expensive but requires very careful attention to detail. However, you can access various software services to streamline the process. These cost around $30 to $150 a month, plus the cost of each employee, which could range from $2 to $15. Still, automated software can help save you time. Manually tracking wages, withholdings, salaries and various other variables can take hours for someone with a large workforce.

If you’re using a payroll software, make sure it can easily integrate into your business bank account.

2. Have employees fill out W-4 forms and required tax documents

Before you can begin the payroll process, every employee you hire needs to fill out their W-4 forms, which indicates their filing status, among other factors. They also need to fill out I-9 forms to verify their identity and employment eligibility.

As an employer, you also need to make sure you have an Employee Identification Number (EIN) or Federal Tax Identification. This identifies your business entity for taxation purposes. You can apply for one on the IRS website.

3. Choose a payroll schedule

After you’ve collected the proper tax forms from your employees, you need to decide how you want to pay your employees. There are four common pay schedules.

  1. Weekly
  2. Bi-weekly
  3. Semi-weekly
  4. Monthly

Be sure to check with the Department of Labor and state authorities to learn about laws and rules surrounding how you pay employees. For instance, some states require employers to pay hourly workers weekly.

4. Record gross pay

You need to document and track the gross pay for each employee during any given pay period. You do this by multiplying a worker’s hourly rate by the number of hours worked during a given pay period. A spreadsheet or payroll software can help you easily track workers’ gross pay while making the right calculations.

5. Calculate deductions, allowances and other withholdings

To properly process payroll, you need to calculate and record the deductions and allowances for every employee. You can find the allowances for each employee on their W-4 forms. And deductions are specified on their 1040-EZ form.

You also need to calculate other withholdings your employees may have. These can include the following.

  • Federal, state and local taxes
  • Social Security
  • Medicare
  • 401(k) contributions
  • Workers’ compensation contributions

6. Determine net pay for employees

Net pay is what an employee gets paid every pay period after deductions. Also called take-home pay, net pay is something you can track on a spreadsheet or with the help of software. By creating pay stubs for each employee, you can track withholding for tax purposes.

7. Calculate payroll taxes

Payroll taxes are state, local and federal taxes that you need to withhold from each employee’s paycheck. It includes income taxes, as well as Social Security and Medicare taxes. You need to keep track of this and then pay your payroll taxes come tax time.

In addition, you may need to pay other business taxes without deducting these from employee paychecks. These can include the following:

  • Federal unemployment tax (FUTA)
  • State unemployment tax (SUTA)
  • State unemployment insurance (SUI)
  • Federal Insurance Contributions Act (FICA) taxes

Bottom line

Processing payroll is an important part of a business’ process. It’s crucial to accurately track and report what you pay employees, deductions, withholdings and other factors. But doing it on your own can be complex, especially for large companies. A payroll software can help you complete the process with software that can track metrics like hours worked, wages and withholdings for each employee much faster than you can on your own. And don’t forget to check that your business checking account easily integrates with your payroll software.

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