How to Do Payroll

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Running payroll is an essential duty of any business with employees. Lots of new business owners are intimidated by the tax requirements and compliance responsibilities associated with payroll. 

But that won’t be an issue if you’re using the right payroll solution—and this guide will teach you how. 

Why Learning How to Do Payroll is Worth It

There’s a big difference between doing payroll and doing payroll the right way. Successful pay runs are more complex than just writing your staff a check for their salary or hours worked. You’ll also need to keep track of their payroll deductions and your own payroll taxes.

Accuracy is another key part of running payroll. Underpaying employees or failing to pay your required tax obligations can lead to serious compliance issues and penalties. Your business could face fines from the IRS, local tax departments, state tax agencies, and potentially be subject to lawsuits from your employees. 

Another reason why it’s so important to learn proper payroll processing is to be as efficient as possible. Running manual pay runs each cycle can be a daunting process, even if you only have a few employees. Not only is this process subject to human error, but it’s also really time-consuming.

The right payroll system can essentially put your process on autopilot. All of the taxes, withholdings, and deposits are handled automatically. 

You can even set up a process with employee self-service tools. This frees up your time from answering questions about I-9 Forms, W-2s, old pay stubs, direct deposit information, and more. So your payroll staff and HR department can spend more time on other tasks.

The Investment Needed to Do Payroll

Assuming you’re not doing everything manually, you’ll need a payroll service provider or online payroll solution to get started. The cost of these solutions vary. Some charge you per employee per payroll cycle. Others charge a fixed monthly rate and per employee rate but let you process unlimited pay runs. 

In either situation, the number of people on your payroll will impact the cost. So if you have 30 or 40 employees, expect to pay more than someone who has five or ten employees. Just be aware that your payroll costs will rise as you continue to grow your staff.

In terms of quality and overall value, Gusto is the best option for most businesses. It’s trusted by over 200,000+ organizations, and pricing starts at just $40 per month plus $6 per employee. 

Once you sign up, you can start onboarding employees almost immediately. You’ll automatically be put on a two-day payment schedule. Some businesses will even qualify for next-day pay runs.

In addition to the cost of setting up your payroll system, you’ll obviously need to have money in the bank to actually process payroll. So make sure you accurately forecast all of your labor costs to ensure there’s enough money in your account to cover your payroll costs. 

7 Steps to Do Payroll

Any business can start running payroll in just seven simple steps. Even if you’re a complete beginner, you’ll be able to do payroll if you follow this process:

#1 – Get an EIN and Open a Business Bank Account

Before you can run payroll, you need to obtain an EIN (employer identification number). 

Think of an EIN as a social security number, but for your business. It’s used by the IRS and other agencies to identify any business that pays employees. 

If you’ve already formed a legal business entity, then this is something you should have applied for during the formation process. But if you’ve been a sole proprietor and haven’t paid any employees yet, then an EIN hasn’t been required until now. You can apply for an EIN here, directly from the IRS website if you don’t have one. 

For those of you who lost your EIN or can’t find it, do not apply for a new one. Check any tax returns, local licenses, or bank accounts you may have used to open an account with that number. Alternatively, you can call the IRS business and specialty tax line at 800-829-4933 for help recovering it. 

You’ll also need a business checking account that’s open and funded to process payroll. This is where the money will get pulled from that will ultimately be sent to your employees.

Even if you already have a business bank account, many organizations choose to open a separate account that’s strictly for payroll. This eliminates confusion with other business activities and masks your main checking account number, which would otherwise be printed on payroll checks. 

#2 – Select a Payroll Solution

Next, you need to determine exactly how you’re going to run payroll. You could do payroll manually, outsource to a professional service, or use payroll software. 

Doing payroll manually is time-consuming, difficult, and prone to human error. While the initial cost may seem cheaper than paying for software, that’s not really the case when you factor in the time it takes to calculate everything by hand. 

Outsourcing your payroll system to a professional service provider takes the burden off of your shoulders. But it’s expensive and doesn’t always benefit your employees. If they have a question or concern about their pay, they likely won’t get an immediate response from an outsourced payroll firm.

Payroll software will be the best option for the vast majority of businesses. It’s affordable, easy to implement, and makes it possible for you to do payroll from anywhere.

Check out this guide of the best online payroll services for our top recommendations. Gusto will likely be the optimal choice for most businesses. 

That’s because Gusto is an all-in-one solution for full-service payroll, employee benefits, HR, time tracking, and more. 

The software handles automated tax calculations and filings on your behalf. It integrates with accounting solutions like QuickBooks, Xero, Freshbooks, and other popular tools.

If you only have 1099 employees, you can use Gusto for $6 per month per contractor, and there is no monthly fee.

If you have full-time employees, you can use Gusto to run unlimited payrolls, and the plans are really straightforward:

  • Simple — $40 plus $6 per employee per month
  • Plus — $80 plus $12 per employee per month
  • Premium — Contact Gusto

The Simple package has everything single-state employers need to run payroll and benefits administration. It’s going to check all the boxes for small companies and those that don’t hire very often.

For multi-state payroll, next-day direct deposit, time tracking, PTO management, and advanced hiring features, you’ll need the Plus package. The Premium package comes with certified HR professional assistance and compliance alerts. 

#3 – Onboard Your Staff

Once you’ve selected and signed up for a payroll solution, you need to add your staff to the system. This is another reason why using an online payroll service makes your life so much easier. 

Rather than manually inputting your staff’s information into the system, you can set up self-onboarding with Gusto. 

All you need to do is enter the employee’s name, email address, and employee classification. Then Gusto will automatically send them an email with self-onboarding instructions. 

Your staff will enter their address, direct deposit information, social security number, and everything else that’s required to process payroll. 

New hires can fill out I-9 forms and W-4s here as well. If you’re adding independent contractors to your payroll system, those users will be prompted to fill out a W-9 form instead. At the end of the year, W-2s and 1099s will automatically be sent out to employees and contractors on your payroll. 

These employee self-service features are ideal for you and your staff alike. If someone moves or wants to change their direct deposit bank account, there’s no need to contact HR or payroll. They can simply log in to their Gusto account and make the changes themselves.

Your staff will also have access to old pay stubs and payroll information as well. So there is rarely a need for them to bother you or your HR staff with payroll-related questions.

#4 – Choose a Pay Run Schedule

There are no federal laws in place that say how often a business needs to pay employees. The FLSA (Fair Labor Standards Act) doesn’t restrict employers from changing the days they pay employees either.

But with that said, you should pick a pay schedule and stick to it. The last thing you want to do is confuse your employees or make it seem like you’re withholding money from them. That’s definitely not a good way to build morale in the workplace.

Additionally, there are several payday laws imposed at the state level. So depending on the location of your business, you may have certain requirements to follow in regards to your pay run schedules.

For example, employers in Connecticut are allowed to pay employees once per month as long as it’s approved by the labor commissioner. Texas employers are also allowed to pay staff on a monthly basis, but only if those employees are exempt from overtime provisions in the FLSA.

The US Department of Labor has a resource on state payday requirements that you can use as a quick reference. But you should always verify these laws directly with your state guidelines.

In most cases, you’ll likely be running payroll on a weekly or bi-weekly basis. Since Gusto lets you process unlimited pay runs, then you can always pay your staff between the regularly scheduled cycles without any problems. 

#5 – Figure Out Gross Pay, Taxes, Deductions, and Withholdings

Now it’s time to crunch some numbers.

If you’re processing payroll manually, then you can expect this to take you a really long time. But with online payroll systems like Gusto, everything will be calculated automatically. 

You need to account for federal payroll taxes like FUTA and FICA. Then there are state payroll taxes, local payroll taxes, social security taxes, workers’ compensation, and other withholdings to consider. 

If you’re offering health insurance and 401(k) contributions to your employees, then you’ll have to withhold these figures from the paychecks as well. 

Some employees might be subject to a court order for wage garnishments. This can happen if someone owes money in back taxes, debt, child support, or a similar scenario.

Fortunately, Gusto handles all of the payroll calculations for you. So the correct gross pay is sent to your employees, and everything else is withheld accordingly. 

#6 – Run Your Payroll

After all of the gross pay, taxes, and withholdings have been calculated, it’s time to pay your staff. Just subtract the taxes and withholdings from the gross pay to get the net pay.

The way your staff gets paid will vary depending on the system you’re using. Some payroll systems give your employees a preference for how they’re paid as well.

Typically, the pay can be issued in the form of a live check, direct deposit, or a payroll money card. 

But the vast majority of employers and employees alike prefer direct deposit. This way, the funds are sent directly to the employee’s bank account that they have on file. 

Even with direct deposit, it’s important to issue a digital pay stub that includes all the payment information for that pay cycle. This includes things like pay rate, hours worked, taxes, withholdings, and everything else. 

Gusto’s payroll software makes it easy for employees to access digital pay stubs and payroll records whenever they want.

#7 – File, Report, and Pay Your Payroll Taxes

After your staff has been paid, you need to file and report your payroll information to various agencies. This includes the IRS, state tax departments, and potentially local tax agencies.

The majority of these numbers have already been calculated (back in step #5) and withheld (in step #6) when you actually ran the payroll. 

This includes things like Form 940 filings, Form 941 filings, FUTA tax deposits, state tax filings, federal tax deposits, and more. 

If you’re using Gusto, you won’t have to worry about filing or paying these payroll taxes by hand. In addition to calculating your taxes, they’ll file everything with the appropriate tax agency each pay cycle. 

Next Steps

Now that you understand exactly how to do payroll, it’s time to ensure you hire the best talent available. Check out our guide on the best recruiting software to help you find and retain top-level candidates. 

If you’re going to offer employee benefits, then you should clearly include information related to your benefits package in your employee handbook. We have a complete guide on employee handbooks that will walk you through this process and what to include. 

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