What is payroll?
Payroll is the process of compensating employees for time worked. It involves designing a compensation plan, tracking work time, calculating withholdings, issuing paychecks and submitting payroll taxes.
How do you process payroll?
It’s helpful to break down payroll processing into 7 components:
- Employee Information Gathering
- Employee Timekeeping
- Payroll Approvals
- Taxes & Withholding
- Employee Payments & Stubs
- Payroll Recording & Reporting
Employee Information Gathering
When you hire an employee, you start by gathering information about that employee. This continues through the onboarding process.
10 Things You’ll Need From Each Employee For Payroll Processing
- Complete job application
- W-4 (The form was updated in 2020)
- 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)
- Contracts, non-compete agreements, intellectual property terms, etc. (if applicable)
- Signatures for employee handbook and policies
What Other Forms Do I Need to Pay My Employees?
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. (We never said this wasn’t complicated.) Contact your local taxing authority for information.
If you hire a payroll provider or service, they will figure this out for you.
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, you distribute paychecks and earnings statements. 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.
Compliance: 6 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