What is payroll processing?
- Determine employee pay rate
- Track work time
- Calculate withholdings
- Issue paychecks
- Submit payroll taxes
How do you process payroll?
Payroll processing can be separated into seven components:
- Employee Information Gathering
- Employee Timekeeping
- Payroll Approvals
- Taxes and Withholding
- Employee Payments and Earnings Statement
- Payroll Recording and Reporting
Employee Information Gathering
When you hire an employee, you start by gathering information about that employee. This continues through the onboarding process.
9 Things You’ll Need From Each Employee For Payroll Processing
- Complete job application
- Application for state withholding certificates (many states require an additional form to the W-4)
- Bank information (if enrolling in direct deposit)
- Medical insurance forms
- Retirement plan documents
- Union contracts and other documentation (if applicable)
- Signatures for employee handbook and policies
Where Do I Get The Tax Forms To Pay My Employees?
Some states allow for mandatory overtime. Even if that’s the case, maintaining a list of employees who want overtime as a first resource helps to improve employee satisfaction.
Accurate payroll depends on accurate employee time and attendance tracking. During onboarding, managers should show employees how to clock in and out of their shifts. An automated employee timekeeping system simplifies payroll processing.
At the end of the payroll period, the employee time tracking information is sent to the payroll administrator. This includes hours worked by the employee. Other pay information must also be sent. This includes any supplemental income earned. Supplemental income can include overtime hours, bonuses, and commissions.
Taxes and Withholding
- After payroll is approved, you calculate withholdings. You have to withhold federal, state, and local taxes. For federal, use the Employer’s Supplemental Tax Guide. Make sure you are using the guide for the correct year.
- Your state has a taxing authority as well. Contact your state department of labor for information about calculating and paying state taxes.
- You might also have local taxes to deal with. Contact your local taxing authority for information.
- Deductions and withholdings must be subtracted from gross earnings. This includes state, federal and local taxes.
- Deduct retirement contributions and healthcare premiums. You may have to garnish some employees’ funds for child support.
Employee Payments and Earnings Statements (Pay Stubs)
Next, distribute paychecks. In addition to providing employees their paycheck, you must include an earnings statement. Some states require employers provide sick leave accrual information. Local family leave laws may require documentation. In certain industries and locations, you may have to provide overtime documentation.
Payroll Recording and Reporting
The IRS requires you to send payroll reports at least quarterly. State reports are usually also reported quarterly.
Critical Payroll-Related Laws Employers Must Understand
- FLSA and DOL requirements
- State or local sick leave laws
- State or local employee scheduling laws
- State or local industry overtime laws (such as restrictions for healthcare employers)
- State or local minimum wage laws
- Federal, state, or local FMLA or other leave laws