How To Do Payroll: A Beginner’s Guide
If you’re a new business owner or are adding employees for the first time, understanding what you need to do to properly run payroll can be overwhelming. But it’s important to get payroll right since errors, delays, and complaints can result in fines or lawsuits.
At Complete Payroll Solutions, we’ve been processing payroll for startups and small companies for over 18 years. We know the steps you need to follow when setting up payroll for the first time to ensure accurate and timely payroll, whether you do it on your own or outsource payroll to a third-party provider.
To help you understand what’s involved in setting up your payroll for the first time, here we’ll cover:
- What do I need to run payroll
- How is payroll calculated
- What withholdings do I need to manage
- How do I pay workers
- Can I do payroll myself
After reading this, you’ll have a solid understanding of what you need to do to set up payroll so you can start paying your new employees.
What do I need to run payroll?
Before you can start processing payroll, you’ll first need to make sure your business is properly established as an entity with the federal and state regulatory bodies. To do this, you’ll need to complete three actions:
- Get an EIN: In order to report and file your payroll taxes, you’ll need to get an Employer Identification Number (EIN) from the IRS. This is also sometimes called an Employer Tax ID. You can apply for this number online.
- Get a State or Local ID: Depending on where you operate, you may need to get an additional tax ID number. You’ll want to check the requirements of your local or state government. This will typically be a Department of Revenue or Department of Taxation.
- Register with Your State: You’ll want to check the requirements for the state where you operate to find out how to register for tax withholding and other state programs. For example, in Massachusetts, you’ll need to create an account for withholding, Paid Family Medical Leave and unemployment insurance.
Once you’ve completed these steps, you’ll be able to start on the activities required to process payroll. And there’s a lot more to payroll than simply paying employees. Here are some of the things you’ll need to do in order to properly pay your employees:
- Gather Employee Information: You’ll need several pieces of information about each employee in order to set them up for payroll. These include their name, address, date of birth, compensation, and Form W-4. If you plan to give your employees the option to receive their pay via direct deposit, you’ll also need to have them complete the necessary forms to process their requests.
- Determine Whether Workers are Employees or 1099s Contractors: It’s essential that you properly classify your employees as either a W-2 or 1099 worker before you start paying them to avoid liabilities for unpaid payroll taxes, fines, and penalties.
- Understand Exempt Vs. Non-Exempt Status: Generally speaking, exempt employees are paid an annual salary and aren’t subject to overtime hours or time tracking. You’ll want to carefully evaluate each position against the DOL’s tests to see if they qualify for exempt status.
- Pick a Pay Frequency: Before you start running payroll, you’ll need to decide how often you want to pay your employees such as weekly, biweekly or monthly. Your state may have specific requirements for your pay schedule so be sure to check with your state’s Department of Labor.
Once you have all these steps complete, you can get ready to start running payroll.
How is payroll calculated?
When you calculate your employees’ pay, there is more than their wages to consider. Here are the steps you’ll need to take when processing payroll.
Calculate Wages and Overtime
When you run payroll, you’ll need to first calculate an employee’s gross pay. For non-exempt employees, this is simply the number of hours an employee worked multiplied by their hourly rate. For exempt employees, you can figure out their pay by taking their salary divided by the number of pay periods in a year. For example, if they earn $75,000 annually and you pay them bi-weekly, their gross pay each period would be $2,884.62.
From gross pay, you’ll need to account for deductions and exemptions from income. These are things like:
- Federal, state, and local taxes
- Social Security
- Benefit contributions such as a 401(k) or health insurance premiums
Once you identify these amounts, you subtract them from gross pay to get the net pay for each employee. This is what you will pay your worker at the end of each pay period, which is also known as take-home pay.
How do I file tax withholdings?
Every quarter, you’ll need to report to the IRS how much money you withheld from each employee’s pay for federal income tax, Medicare, and Social Security. You’ll do this on Form 941, which is known as the Employer’s Quarterly Federal Tax Return.
Be sure to file these on time or you risk being fined a 10% penalty by the IRS.
What methods can I use to pay my employees?
Once you calculate net pay, you’ll pay them by the method you and/or they choose. That could be by paper check, direct deposit, paycard, or advanced pay. The key is to choose a reliable method to ensure employees are paid on time since late pay can create morale issues.
No matter what option you choose, you’ll also want to make sure you follow any state requirements for providing pay stubs to workers.
What records do I need to maintain?
Each time you run payroll, you’ll need to keep records that were used to calculate pay such as time cards, schedules, and additions to or reductions from wages for compliance with the Fair Labor Standards Act. You should keep these records for at least 3 years.
Can I run payroll myself?
The short answer is yes. Many companies choose to run payroll on their own using either manual, paper-based methods or a software. But as you can see, there are a lot of steps involved with processing payroll. And it can take a lot of time. In fact, a QuickBooks study showed that business owners spend 4 hours and 52 minutes calculating, filing, and preparing payroll taxes each pay period.
Those who want to spend less administrative time on payroll often decide to outsource payroll to a vendor. With outsourcing, you’ll not only have more time to spend on revenue-generating functions but will increase the accuracy of your payroll and tax calculation and ensure timely pay.
Getting Started with Payroll
As you get ready to run payroll for the first time, there’s a lot to consider. But if you follow this step-by-step guidance, you should have a good overview of what you need to do.
If you find that you want to outsource payroll, Complete Payroll Solutions can be a good choice for you if you’re looking for:
- Seamless integration with your other business systems
- Paperless payroll options that make pay more instantaneous
- Data security with 24/7 monitoring
- A stable vendor
- A team of local payroll specialists
- Solutions beyond payroll such as outsourced HR and employee benefits
Do you think Complete Payroll Solutions is the right choice? Take a look at our most popular payroll packages and see which one is the best fit for your business.