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Steps in the Payroll Process
The payroll process includes three basic steps:
Before You Hire and Pay Employees
You’ll need to make some decisions on paying employees in order to write paychecks. How often will you pay? What about paid time off? Will you pay overtime? Find out about all the federal, state, and local employment laws, because they affect the amount you pay employees and check with an employment attorney to make sure you are following all the laws.
Decide on an Accounting System
Most small businesses use an online accounting system with a payroll processing option. Look into Android small business payroll apps and QuickBooks payroll online.
Collect Paperwork New Hires Must Sign
Each new employee must complete certain paperwork as part of the onboarding process. You must be certain that the new hire forms and applications are completed and filed. These include:
An IRS W-4 Form to designate withholding An application form An I-9 Form to show eligibility to work in the United States State and local tax withholding election documents
Set Up Direct Deposit for Paychecks
Contact your bank to find out how their direct deposit system works. You’ll also need to get authorization from each employee and information about their checking accounts, such as account numbers and routing numbers.
Set Up a Separate Payroll Account
Set up a separate bank account for writing paychecks or paying through employee direct deposit. You’ll also need this account for depositing funds you collected from employees for federal and state income tax and for Social Security and Medicare taxes (referred to as FICA taxes) and other amounts.
Get an Employer Identification Number
An employer identification number (EIN) is effectively a Social Security number for businesses for federal tax purposes. You’ll need one if you’re going to have employees. Contact the IRS and they’ll assign one to you, or you can apply online.
Paying Employees
Pay your employees according to the pay periods you’ve decided upon. This involves figuring out how much they’re each owed, and subtracting withholding and other deductions from their pay.
After You’ve Paid Employees
You must make certain payroll tax deposits to the IRS and state and local agencies for amounts you have taken out of employee paychecks:
The amounts you withheld from employee pay for federal and state income taxesThe amounts you deducted from employee pay for Social Security and MedicareThe amounts you owe as an employer for Social Security and Medicare
You can make your payroll tax deposit payments using the IRS’s electronic federal tax payment system (EFTPS).
Other Payroll Tax Deposits
You must make payments for federal unemployment tax on a regular basis in addition to federal withholding and Social Security/Medicare deduction payments. You must also make payroll tax deposits to your state, and possibly your locality, in addition to federal payroll tax deposits.
Payroll Tax Reporting
Businesses are required to submit certain payroll tax reports on a regular basis:
Quarterly reports to the IRS on Form 941 showing the amount of your payroll tax liability and the amounts you’ve paid on this liability during the previous quarter Annual unemployment tax reports to the IRS on Form 940 showing the amount of your unemployment tax liability and the amounts you have paid on this liability Reports to state and local taxing agencies
Create a Payroll Register
Create and maintain a payroll register to keep track of all payroll information for each employee. Most online accounting systems these as part of their package of reports. You’ll need this information for year-end payroll totals and reports.
Create a Yearly Tax Calendar
Creating and maintaining a month-by-month payroll tax calendar, either on your accounting/payroll software or manually, will help you keep track of all those payroll tax dates during the year. Add in your state’s payroll tax dates for a complete calendar.
Getting Help With Payroll
Even if you decide to do payroll and payroll tax processing yourself, you’ll need to have a licensed tax professional to oversee the process. Payroll processing is complex and taxes and laws are always changing, and each tax year is different in some way. The IRS, for example, requires that all payroll forms and pay and benefit information must be kept for four years. The Department of Labor (DOL) requires employers to keep records on employee pay rate, hours worked, and overtime worked for at least three years. For state recordkeeping requirements, see the website of the workforce agency for your state. Another option is an offline service through a payroll company. They give more personal service, which is also based on the number of employees. Fees usually include processing the payroll, collecting the taxes due, and preparing reports for taxing agencies,
