If you’re running a large or small business, chances are you’ll need to do payroll at some point. Payroll can be a complex and confusing process, but it doesn’t have to be.
In this complete guide, we’ll walk you through everything you need to know about how to do payroll, from setting up your account to processing payroll taxes.
What Is Payroll?
Payroll is the process of sending money to your employees for the work they’ve done. This includes their regular wages, overtime pay, and other compensation they may be owed. Payroll can also refer to the company that handles this process for you.
When you do payroll, you’ll need to keep track of each employee’s hours worked and calculate how much they’re owed. You’ll also need to withhold money for taxes and other deductions and then send the money to the appropriate government agencies.
How To Set Up Payroll
You can process payroll in a variety of ways, but the procedure is essentially the same. To begin, you’ll need to supply federal and local authorities with information about your company and its employees. Creating a payroll timetable and deciding which benefits to offer are also crucial parts of the process, as is purchasing workers’ compensation insurance and establishing a payroll bank account. Below, we go in-depth on each of these topics.
Step 1 – Apply For An EIN (Employer Identification Number)
To obtain an EIN, you’ll need to fill out an application with the IRS. The easiest way to do this is online, but you can also apply by fax or mail. Once you have your EIN, you’ll use it to identify your business on all tax forms and documents.
Steps for Completing the Application:
- Visit the IRS website and select “Apply for an EIN.”
- Enter your contact information, including your name, address, and phone number.
- Select the type of entity you have (sole proprietorship, partnership, corporation, etc.).
- Choose whether you want to apply online, by fax, or by mail.
- If you’re applying online, you’ll need to answer some questions about your business.
- If you’re applying by fax or mail, you’ll need to print out and fill out Form SS- four.
Once you’ve submitted your application, the IRS will assign you an EIN. You should receive your number within four weeks if you apply online, by fax, or by mail.
Step 2 – Obtain Your Local Or State Business ID
Businesses must have an identification number in order to operate in many states and local jurisdictions that assess federal income tax. The method for obtaining one varies depending on where you live, so contact your state’s department of revenue for further information. In general, you should apply for a federal EIN first since some states may use the same number to identify your company.
Additionally, many states demand a state unemployment ID number that is distinct from your state income tax number. This is the number you’ll use to submit state unemployment benefits for your staff. If you’re based in New Mexico, Washington, or Wyoming and wish to apply for workers’ compensation insurance, you’ll need a different ID number.
Step 3 – Collect Employee Documents
The U.S. government requires that employers verify the identity and employment eligibility of each person they hire. To do this, you’ll need to collect some documents from your employees.
You’ll need to keep these documents on file for at least three years or until the employee is no longer working for your company, whichever comes first.
Documents you may need to collect include:
A completed I-9 form: All new employees must fill out the 1-9 form to prove their identity and employment eligibility.
A W-4 form: Employees use the W-4 form to claim allowances that affect how much tax is withheld from their paychecks.
State tax forms: Some states have their own withholding forms that employees must complete.
Other documents include Proof of identity (e.g., a passport or driver’s license), work authorization (e.g., a green card or visa), Social Security Number, and State ID number.
Step 4 – Settle On A Payroll Schedule
You’ll need to decide how often you want to run payroll. The most common options are weekly, biweekly (every other week), semi-monthly (twice a month), and monthly. You may also choose to run payroll more or less frequently, but keep in mind that the government requires that you pay employees at least once a month.
You’ll also need to decide which day of the week or month you want to issue paychecks. For example, if you have biweekly pay periods, you might choose to pay your employees on Fridays, so your employees have money for the weekend. Just make sure you’re consistent with payday so your employees can plan their finances accordingly.
Here is a simple guide on choosing what pay period suits your business the most:
Weekly compensation is typical in the manufacturing, construction, and food service industries. Manual labor occupations with low wages may benefit from this type of payment. To meet their living circumstances, these employees must be compensated more often.
Biweekly payments are made every other week and have become the norm in corporate America. Many employers choose this method because it evens out their annual payroll expenses.
With semi-monthly payments, employees are compensated twice a month, usually on the 15th and last day of the month. This is the most common type of pay period, especially for salaried workers.
Monthly compensation is less common and is usually reserved for people who earn high salaries.
Step 5 – Purchase Workers’ Compensation Insurance
If you have employees, you’re required to have workers’ compensation insurance in most states. This type of insurance covers medical expenses and lost wages for employees who are injured on the job.
You can purchase workers’ compensation insurance through an insurance agent or broker or directly from a workers’ compensation insurance company.
The cost of workers’ compensation insurance will vary based on your business’s industry, size, and location.
Step 6 – Open A Payroll Bank Account
Once you have workers’ compensation insurance, you’ll need to open a payroll bank account. This is a separate account that you’ll use specifically for your business’s payroll expenses.
Having a separate account will help you keep track of your payroll expenses and make it easier to reconcile your bank statements each month.
How To Do Payroll
Now that you know how to set up payroll, you need to calculate your employees’ wages. Below, we list steps on how to calculate payroll for your business:
Step One – Calculate Hours Worked And Gross pay
To calculate an employee’s gross pay, you need to first sum up the number of hours they worked. For salaried employees, this is typically easy since they usually work a set number of hours each week.
For hourly employees, you’ll need to track the number of hours they work each day or week. You can do this using time cards, a time clock, or a time-tracking app.
Once you have the number of hours worked, you can calculate gross pay by multiplying the number of hours worked by the employee’s hourly rate.
Step Two – Calculate Deductions & Payroll Taxes
The next step is to calculate deductions & payroll taxes for each employee. These deductions may include federal and state taxes, Social Security and Medicare taxes, health insurance premiums, and retirement plan contributions.
You can use payroll software to calculate deductions or do it manually using a payroll calculator.
Step Three – Calculate Net Pay
After you’ve calculated gross pay and deductions, you can calculate an employee’s net pay by subtracting deductions from gross pay. Net pay is the amount of money an employee will take home each pay period.
Step 4 – File Tax Reports
The final step in the payroll process is to file tax reports. You’ll need to file federal, state, and local tax reports as well as any required unemployment insurance reports.
You can file these reports electronically or by mail. Most businesses opt to file electronically since it’s faster and easier.
Step 5 – Document And Store Payroll Records
Once you’ve completed the payroll process, be sure to document and store all payroll records. These records should include employee time cards, pay stubs, and tax reports.
You should store these records for at least four years in case you’re audited by the IRS or your state’s tax agency.
Can’t Handle Your Payroll Yourself? Use A Payroll Service
A payroll service is a company that can help you with all aspects of the payroll process. These services can calculate wages, withhold taxes, and file tax reports on your behalf.
Payroll services typically charge a monthly fee plus a per-employee fee. The cost will vary depending on the size and needs of your business.
While some businesses opt to do payroll themselves, others outsource this task to a payroll service.
5 Benefits Of Using A Payroll Service
There are several benefits of using a payroll service. Below we discuss some of them:
Saves time – One of the biggest benefits of using a payroll service is that it saves you time. With a payroll service, you don’t have to worry about calculating wages or filing tax reports.
Reduces mistakes – Another benefit of using a payroll service is that it reduces the chance of errors. Payroll services have experience calculating wages and withholdings and are less likely to make mistakes.
Lowers stress – Doing payroll can be stressful, especially if you’re not experienced in this area. A payroll service can take this stress off your shoulders.
Affordable – Many businesses think that using a payroll service is too expensive. However, most payroll services are very affordable, especially when you consider how much time and money they can save you.
Flexible – Payroll services are also very flexible. They can tailor their services to meet the needs of your business, no matter how small or large it is.
Need Help With Payroll Management? Contact Global Solutions (GSI)
Poorly handled payroll may result in dissatisfied workers, non-compliance, and inaccurate personnel records. GSI has experience managing payroll in all 50 states, Canada, and the United Kingdom. On the platform of your choosing, we run payroll. We help you remain compliant while reducing the administrative strain that payroll causes.
Our team members are experts on the majority of major payroll platforms, as well as smaller, more affordable regional payroll solutions.
By managing payroll calculations, deductions, timesheets, and employee inquiries for our clients, we save time for business owners.
What We Do:
- Payroll processing for all W-2 employees on client selected payroll platform
- Monitor, track, and update timesheets and time-keeping system
- Set up tax withholdings for employees in compliance with federal, state, and local tax laws
- Work directly with employees to ensure timesheets are submitted accurately and on time
- Act as Point of Contact for all employee payroll and timesheet questions
- Enter new hires and terminations into the payroll system
- Maintain accurate and compliant payroll files
Contact us to discuss your specific needs. Let us take the burden of payroll management off of your shoulders!