How to Process Payroll for Small Business: 5 Steps
Five easy steps to process payroll for small businesses. It can be challenging to run payroll, especially if your company doesn’t have one.
There are many things to remember, including federal income tax, state income taxes, Social Security, and other payroll deductions.
To ensure compliance with the law, you must ensure that your payroll system is correctly set up and processed. Payroll accuracy is not only crucial for compliance but also employee satisfaction.
Many tools can help you simplify the process of payroll.
How to Process Payroll: 5 Easy Steps
This guide will show you how to set up and run payroll without difficulty, regardless of your experience level.
- Select your payroll method
- Add your employees
- Choose a payroll schedule
- Calculate gross salary, deductions, and other withholdings
- File reports and run payroll
Payroll: The Simple Parts
It’s not challenging to start payroll. Many people find it challenging to get started because they feel intimidated and don’t know where to start.
However, it is straightforward and seamless if you use an online payroll service.
Gusto may be a good option. You will only need to answer some questions about your company and employees to get started.
You can easily set up self-service for onboarding your employees because everything is available online. This takes a lot off your shoulders.
Another daunting task for business owners is to calculate payroll taxes and file them with the appropriate government agencies. Gusto is an online payroll system that does all this automatically.
Payroll: The Hard Parts
Payroll compliance is not without its challenges. The main concern is payroll compliance.
Payroll mistakes can lead to severe penalties and fines, and possible lawsuits. Employers make common payroll errors every day, including underpaying, overpaying, miscategorizing employees, and miscalculating deductions.
Payroll software can help reduce some mistakes but not all. You still have to ensure that employees are correctly classified, regardless of whether they are exempt or not.
A key aspect of payroll management that is often overlooked is ensuring sufficient funds for all payroll expenses. This can be a problem for small and startup businesses.
To pay your employees each payroll cycle, you must have sufficient cash in the bank. If you don’t have enough working capital or your business is slow, you might need a payroll loan to ensure everyone gets paid. If you aren’t careful, this can become very costly and cause financial problems.
Step 1 – Select Your Payroll Method
You must first choose the payroll processing system that you will use. There are generally three options available: software, manual, or outsourced.
Each method has its pros and cons. For most businesses, payroll software is the best choice. We’ll be taking a closer look at each system below to help you decide which one is best for you.
Manual Payroll Systems
Manual payroll processing, as the name suggests, is done manually. You might be familiar with this payroll method and have recognized the difficulties. Manual payroll processing is time-consuming, complicated, and error-prone. This guide was created to help you.
Here’s the basic idea behind manual payroll systems without getting too detailed.
Your staff will complete time cards and punch the clock to determine their shifts. Next, you will need to calculate their wages and taxes and write checks manually.
This might be a quick and easy way for small businesses to start payroll. It’s not sustainable and should not be used as a long-term solution.
Manual payroll systems are not only time-saving but also more efficient. However, if there are compliance problems or errors made, it may end up costing you more. We do not recommend this option.
Software for Payroll
Most businesses can process their payroll using modern, efficient Payroll Software software. These online systems offer simplicity and automation for employees.
Online payroll systems make it easy to eliminate paper and provide self-service options to your employees. They can update their information instantly without contacting you or your HR staff.
The best thing about payroll software is its accuracy. Payroll software eliminates manual steps that can lead to mistakes.
Let’s take Gusto as an example. Gusto can be integrated with time tracking software and accounting systems to ensure that all hours worked are accurately paid.
This will save you time and avoid common mistakes when handling payroll manually.
Gusto, an online payroll platform, is an excellent option because it offers everything you need for employee onboarding, time tracking, and employee benefits. Instead of switching between different platforms, you can access all the features you require from one platform.
Another benefit is the ability to scale. It’s simple to add new employees to your payroll system as your business grows without extra work.
Although payroll software is more costly than manual payroll processing, it is still affordable. Gusto costs only $35 per month and $6 per employee. The fees can be justified when considering the possible cost of a lawsuit or compliance fine. Visit our Gusto review for more information. Gusto ranks #1 on our list of best payroll services for 2022.
Many businesses prefer to keep their payroll in-house. Another option is to outsource your payroll process to third-party professionals. This is the most costly route.
Outsourced payroll companies can be very reliable. They can handle everything, from employee information collection to tax filings, payroll stubs, direct deposits, and more. Your staff can contact the payroll company directly for any question or problem.
Outsourced payroll companies won’t technically work for you. You don’t have the same control over their availability and services.
Staff can have questions on weekends or after-hours, but it may take some time to get an answer. These issues won’t occur with online payroll software, as these platforms are accessible 24/7 via self-service portals.
Outsourced payroll systems are only available to a minimal number of businesses. These payroll systems are great for small businesses that don’t have the budget to hire an in-house payroll department but still need a dedicated payroll staff.
Gusto Payroll Video: How to Run Payroll
Step 2: Add your employees
No matter which payroll method you choose in the first step, you will need to add your employees to the payroll system.
You must ensure that you have the correct forms for each employee added to your payroll correctly and stay compliant. Each employee must complete a W-4 form and an I-9 form. You will need 1099 forms if you use independent contractors or freelancers.
Another reason to use an online payroll system is that it’s easy and convenient. Instead of printing these forms out and collecting them manually, everything can be done digitally.
These forms can be completed online by your staff, which will drastically reduce the amount of work on your part. The process is quick and easy as you grow and hire more employees.
You can fill out the necessary forms online and add your direct deposit information. They will then be automatically added to your payroll system.
Step 3 – Select a Payroll Schedule
Employers are allowed to change paydays according to the Fair Labor Standards Act. Federal law does not impose any restrictions on the frequency of payroll runs.
Payday laws are mandatory in many states.
California, for example, requires employers to pay employees at minimum twice per month. Utah employees can only be paid one month for an annual salary.
For more information on your state mandates, check out the state payday requirements of the US Department of Labor. A labor attorney should be consulted to ensure that your payroll schedule complies with local and state laws.
All laws and regulations aside, it is in your best interests to choose a schedule that works for your employees and stick to it. Your staff will not be happy if you delay payroll for days or even weeks. This can cause serious problems for your company.
These are generally the options you have:
- Weekly payroll — 52 pay cycles each year
- 26 Pay cycles per year — Bi-weekly payroll
- Semi-monthly payroll – 24 pay cycles per annum
- Monthly payroll — 12 pay cycles each year
Businesses tend to follow a weekly or bi-weekly plan.
Gusto allows unlimited pay runs, so you don’t have to follow the schedule. This includes bonuses as well as off-cycle pay runs. Gusto makes it easy to pay people for unexpected events outside of the average pay period.
Step 4: Calculate Gross Pay, Deductions, and Other Withholdings
Now comes the tricky part of managing payroll. Payroll taxes, wage calculations, withholdings, and all the other numbers that can make your head spin are just a few of the many things you will need to manage.
It is easy to calculate gross pay. Multiply the hourly rate of hourly workers by the hours worked in that pay period. For non-exempt employees, overtime is not included.
Take the annual salary of staff who are paid and divide it according to how many pay cycles they work in a year. A salaried employee earning $78,000 per annum on a bi-weekly basis will get $3,000 per cycle in gross pay.
Both employees and employers usually pay payroll taxes. Many variables affect the exact amount of taxes that are paid. Payroll taxes generally include:
- Federal payroll taxes
- State payroll taxes
- Local taxes
- Social security taxes
- Workers’ compensation
Payroll taxes such as FICA (Federal Insurance Contribution Act), and FUTA (Federal Unemployment Tax), must be withheld from employees’ paychecks.
It is tough to calculate these numbers manually. We recommend that you use a payroll service to calculate payroll taxes automatically.
Gusto automatically calculates these taxes and files them each pay cycle.
There are many other types of withholdings depending on the business and employee.
This category includes 401(k), contributions, health insurance, and other employee benefits.
Also, wage garnishments should be considered. A court may order an employer to withhold a certain amount from an employee’s paycheck to pay for consumer debt, student loans, or child support.
Step 5: Run Payroll and Filing Reports
It’s now time to pay your employees. Add all taxes and withholdings to the gross pay you calculated in step 1. This is the net salary.
Pay can be issued in many ways depending on which payroll system you use.
- Live checks
- Direct deposits
- Payroll money cards
Most employees prefer direct deposit. It also makes it easy for you. Direct deposit is a good option, but you should still have a payslip that contains all the details for each pay period.
A digital pay stub can include all hours worked, pay rate and deductions, as well as net pay.
Your staff can access their records anytime they want if you use an online payroll system such as Gusto. You can go back to check for an older pay stub or to view withholdings from the previous year.
Employers are responsible for filing reports and information to various agencies, in addition to paying employees. This is mainly due to the tax calculations in step 4.
These are the most common federal and state payroll filings:
- Federal tax deposits — FICA, and employee tax withholdings to IRS
- Files of state tax — Income tax and unemployment taxes for each state (varies from one to the next).
- FUTA tax deposits — Quarterly taxes to the IRS for federal unemployment tax.
- Filing Form 941 — Quarterly Federal Tax Return for Employers
- Filing Form 940 — Annual Report for FUTA taxes
The filing process will be automated if you use a comprehensive payroll system like Gusto.
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: email@example.com