How to Flawlessly Run Payroll (a Step-by-Step Checklist)

In 2016 alone, 82 million people were impacted by payroll problems in the US. That's a staggering 54% of the American workforce.

Payroll is an essential part of a business that needs handling correctly and with precision. If you’re constantly bumping into issues or spending more time than necessary sorting out payroll, we’re here to tell you it doesn’t have to be this way.

There’s a straightforward method that doesn't include burning yourself out or frustrating your employees. Read on to learn how to run payroll–the right way.

What Are the Preliminary Requirements for Setting up Payroll in the US?

It's crucial to get together a quick-look payroll checklist. It should contain everything you'll need to hit the ground running.

This includes:

• Federal Tax ID number or Employee Identification Number (EIN)
• This is used to identify a business entity. If you need to apply for an EIN, (check out the IRS website for a detailed guide)
• Local Tax ID numbers
• State and Local Withholding Accounts (this is where you’ll store a withholding tax amount from an employee's wages to go directly to the government)
• Employee Pay and Tax Information (this is the amount an employee is earning and the tax bracket they fall under)

Some states and local governments require businesses to source ID numbers to process taxes. To request a taxpayer identification number and certification, click here for the W-9 form.
 

Each US employer will also need to complete a Form I-9 for each individual they hire to verify their identity.

The employee will then have to provide you with suitable documentation to evidence their identity and employment authorization. This process is the same for both citizens and non-citizens.

How to Flawlessly Run Payroll: The Main Steps

There are a few key steps involved in processing payroll.

Calculating time: You’ll do this by assessing your employee's hourly time cards and timesheets.

Calculating gross pay: Gross pay is the amount of pay earned before taxes and deductions. You’ll do this by assessing your employee’s hourly rate and the number of hours they worked that month.

Determining withholdings: Withholdings are the amounts needed for federal and state taxes benefits and withholdings. The amount of income tax withheld will depend on how an employee filled out their IRS W-4 Form. This includes a worksheet that helps employees determine their withholdings based on factors like how many jobs they hold, their marital status, and their number of dependents. 

Calculating net pay: This is the final payment issued to an employee after taxes and deductions. You can figure this out once you’ve determined and set aside withholdings.
 

Issuing pay: Pay is typically issued via direct deposits or cutting checks. 

Distributing Withholdings: This is the part where you send off your employee’s taxes and other withholdings to the appropriate accounts and service providers.

Payroll Tips: Your Employees

Your employees also have a duty to comply with these procedures.

To maintain compliance, employees will need to:

• Keep detailed, completed, and organized records (for example, of their working hours and their withholdings)
• Pay state and federal taxes promptly to avoid penalties. Employees can do this through the EFTPS online system provided by the US Department of the Treasury. 
  
  

You'll also need to report hiring and workforce changes to the IRS

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How to Run Payroll: A Processing Checklist

If you want to run your payroll efficiently, you’ll need to be proactive. This means keeping on top of things and being thorough in your approach. To do this, you may find it helpful to run through a simple checklist.

Before Processing

Make sure you have all the information needed to meet the preliminary requirements (as mentioned above). You should also make sure you have your payroll budget account, payroll schedule, and tax payment schedule ready. 

Review Employee Information

Before you begin, make sure to review your employee’s information. 

For New Employees: this will include names, addresses, social security numbers or EIN, and the details provided on their forms (W-9, W-4, etc.). 

For Existing Employees: check you’re up to date with any changes to address, withholdings, benefits, employment status, job title, and wage or salary.

Calculate Gross Pay

For Hourly Employees: Do this by checking signed time cards and approved timesheets and calculating any commission, bonuses, retroactive pay, overtime, or paid time off.

For Salaried Employees: You’ll need to look at gross pay, paid time off, retroactive pay, commissions, or bonuses. 

Calculate Net Pay

This is the take-home pay your employee receives after you, as the employer has made all the necessary payroll deductions. You can calculate net pay by subtracting deductions from the gross pay.

Before first, make sure the tax information for your employees is correct and factor in any tax-exempt adjustments.

To Finish Off

Last but not least:

• Conduct a final review of the appropriate information and ensure it’s correct
• Issue payment to your employees using your preferred method
• Distribute withholdings appropriately

That's it!

A Note on Employee Classification and Independent Contractors

Depending on the needs of your business, you may need to hire an independent contractor from time to time. You don't employ independent contractors.

Instead, they perform a set amount of work over an agreed period. As you don't remove taxes from their pay, you should classify independent contractors correctly on your payroll to avoid penalties.

Under employee classification, workers can fall into three categories: 1099, W-9, or W-2.

Each employee classification also has different specifications that dictate various work assignments, business manager direction, and company control.

If you’re unsure whether a worker is an independent contractor or an employee, you can fill out Form SS-8 with the IRS. This can be done by either the business or the worker.

Provide the IRS with the facts and circumstances. They’ll determine employee classification for you; however, this can take up to six months.

Are You Ready to Better Manage Your Payroll?

We hope that, having read this article, you now have a better idea of how to run payroll. By using the preliminary and processing checklist outlined above, as well as all the other advice in this article, you shouldn't go too far wrong.

But if you have any questions on the subject, we're here to help. Contact us for a free consultation.

Are you looking for more payroll processing information? Check out our Ultimate Guide to Payroll Processing.

Is payroll a thorn in your side? Let us handle all the stress related to payroll so you don't have to...