Processing payroll is the method followed to pay employees after a payroll period. This procedure requires numerous processes to verify that payment is correctly computed, monitored, and distributed, as well as that the appropriate amounts are withheld for taxes, business benefits, and any other deductions that may be applicable.
What Are the Steps in Payroll Processing?
Checking employer identification number
Establishing your Employer Identification Number (EIN) along with your state and local tax IDs is the initial step in processing payroll. The federal government will use these identifiers to monitor your company’s payroll taxes and check that you are complying with all of the regulations.
Visit the website of the Internal Revenue Service to establish an EIN if you are unsure about your EIN or if you do not already have one. You will need to contact your state and the municipality in which you live to obtain your state and local tax IDs.
Gather pertinent employee tax data
Your employees will need to complete a variety of tax forms before you begin the process of processing payroll. This will enable you to account for allowances and other tax-related factors. There are a variety of state and municipal forms that you will be required to submit, but the location of your business will determine the specific paperwork you must submit.
Choosing payroll schedule
When setting up payroll, you may pick a plan that works best for your company once you have all the necessary tax and legal information. The four most common time frames are monthly, semimonthly, and weekly.
Before choosing the ideal plan for your company, you should familiarize yourself with the options. When you’ve settled on a routine, create a calendar with paydays and mark the dates you’ll need to run payroll so that employees are paid on a predetermined day.
Calculating gross pay
Begin by determining the number of hours a worker worked in a given pay period and noting any overtime hours. The additional time must be compensated at a higher rate following federal legislation. If an hourly worker exceeds 40 hours per week, time and a half must be paid, or the employee’s hourly rate plus one-half of that wage.
Determine the amount of money to be withheld from each employee’s paycheck by referring to their W-4 forms, federal and state regulations, insurance mandates, and benefit plans. This is where things can get tricky; states tax small businesses in varying ways, so you’ll need to familiarize yourself with your state’s rules before proceeding.
Obtaining net pay
Reduce each worker’s take-home pay by the number of deductions they’ve made. The leftover sum is the worker’s actual wage or net pay. Each employee will receive this salary. Withholding the deductions and regularly remitting them along with your payroll taxes is required.
For tax and regulatory reasons, keeping detailed records of all payroll transactions is essential. You should keep records if an employee later raises a payment issue or the IRS requests proof. It’s crucial to keep records, particularly year-to-date payments, in case an employee disputes a paycheck and you need to resolve any related difficulties.