There’s more to payroll than calculating wages and submitting paystubs. Payroll management is a detailed process that requires business owners to properly compensate employees for services performed, which includes calculating employee hours, distributing pay, withholding taxes, and keeping detailed financial records. As a business owner, this can be a lot to tackle. Luckily, there are trusted companies that can provide payroll services to business owners just like you.
Because payroll can be an overwhelming process, we’re here to guide you on how to manage your payroll process effectively. Continue reading to learn how to set up your payroll, how to manage your payroll, and what you need to document and file.
Setting Up Your Payroll
Before you can begin running payroll, you need to set up your payroll system. The first step involves registering for an Employer Identification Number (EIN).
1. Apply for an employer identification number
An employer identification number is a unique nine-digit number the Internal Revenue Service (IRS) assigns to identify each business. EINs are also used for filing tax returns, submitting payroll, and providing identity protection for your company. You can obtain an EIN for free on the IRS website. Additionally, depending on local and state government regulations, you may need a state ID number to pay state income taxes. Learn more about your state’s registration requirements here.
2. Collect employee information
To properly pay your employees, you need to collect the necessary information. Employers must obtain each employee's full name, address, Social Security number, and tax withholding forms. Each employee must also fill out the following government documents:
- Form I-9: Employee Eligibility Verification
- Form W-4: Employee's Withholding Certificate
- State withholding allowance certificates
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- In most states, you’re required to withhold state taxes, as well as federal income taxes, from employee wages. Therefore, your employees must complete the IRS Form W-4 or a state withholding certificate.
3. Determine a payroll schedule
After collecting the necessary business documentation and employee information, it’s time to choose a payroll schedule. A payroll schedule is the length of your pay period and determines how often you pay your employees. The most common pay schedules are weekly, bi-weekly, or monthly.
It’s important to note that your pay schedule should meet state regulations and fit your employees’ needs. For example, a payroll schedule may differ for a business that employs all salaried workers compared to a company that employs mostly hourly employees.
Payroll Management
Once you’ve obtained your EIN, the necessary employee information, and selected your payroll schedule, it’s time to run your first payroll. We’ve listed a brief overview of how to get started running your first payroll:
1. Calculate gross and net pay
To calculate gross pay, you must add up the hours worked by an employee during the predetermined pay period; make sure to include bonuses or overtime pay. The total hours worked is then multiplied by each worker’s pay rate to determine the gross pay. Employers often use timesheets, punch clocks, spreadsheets, or timekeeping software to make time tracking easier.
After calculating gross pay, it’s time to make your pre-tax deductions. If you offer your employees benefits such as a 401(k) retirement plan, health benefits, or life insurance, then you’ll need to withhold those contributions. Next, you must deduct Federal Insurance Contribution Act (FICA) taxes, which include federal and state income tax, Social Security taxes, and Medicare taxes. Then, you must subtract the post-tax deductions, which may include court-ordered wage garnishments or union dues.
When all pre-tax and post-tax deductions are subtracted from the gross pay, your final number is your employee’s net pay or the amount your employee takes home.
2. Pay employees and deduct withholdings
After making your payroll calculations, you’re ready to generate paychecks and initiate direct deposits. Payroll taxes must be filed with the government regularly and vary based on local regulations, business size, and location. You may be liable to pay the IRS if you fail to withhold the employee portion of employment taxes.
Filing And Documentation
While calculating payroll and tax deductions are an important part of processing payroll, you also must file these deductions with various agencies, including the federal government. These tax reports include:
- Form 941 – Employer’s Quarterly Federal Tax Return
- Employers use this form to report income taxes, Social Security taxes, and Medicare taxes withheld from employee paychecks.
- Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
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- Only employers pay FUTA taxes – DO NOT deduct FUTA tax from employee wages.
After filing these reports, you must document and store these records. Filed records should include tax filings, pay stubs, and employee information such as address, occupation, birth date, and more. Business owners must keep all payroll records and documentation for at least three years. Failure to do so may result in costly penalties or non-compliance fees. Businesses that violate Fair Labor Standards Act (FLSA) requirements, such as minimum wage, overtime pay, or record-keeping, may be fined up to $1,000 per violation. Keeping payroll records is also useful when you send your annual report to the IRS and can provide evidence if there is ever an employee compensation dispute or audit. These fees can quickly add up and take their toll on your bottom line.
Choosing Your Payroll Process
It’s important to note that there’s more than one way to process your payroll. The best option for your company may depend upon your industry, budget, the type of workers you have, or the amount of time you have. There are three main options to choose from:
1. Manual payroll
Manually processing payroll is the most inexpensive way to process it. Despite the fact that manually processing payroll is less expensive than software or outsourcing, you, as a business owner, will be liable for any mistakes made. If you’re like most business owners who don’t have extensive payroll training, manually managing payroll can leave you vulnerable to costly errors and IRS penalties.
2. Payroll software
Investing in payroll software allows you to streamline your payroll process by managing tasks online, automating payroll calculations, and more. While software can save time and simplify the overall process, you will still need to oversee payroll compliance and management.
3. Outsourcing payroll
Although outsourcing payroll services is more expensive, it can save you time and potentially reduce compliance issues. When you outsource payroll administration to an outside company, such as a professional employer organization (PEO), you have access to payroll experts who take care of every function of payroll management, such as recordkeeping, handling payroll taxes, and processing paychecks. While a PEO streamlines these processes, you will still retain full control and direction over your employees.
GMS: A Trusted Payroll Partner
Whether you’re a payroll expert or not, the payroll process can be tedious. It can also be time-consuming to manually calculate paychecks or stay up to date on payroll regulations and important filing dates. Luckily, Group Management Services (GMS), a PEO, can take the burden of payroll off your shoulders.
With GMS’ state-of-the-art payroll technology and dedicated Payroll Specialists, you can spend less time worrying about overtime calculations and tax deductions and more time focusing on growing your business. As a PEO with strong data security, quality customer service, and accurate processing technology, GMS can be the trusted partner that decreases your workload, lowers liability, and ensures compliance.
Contact GMS today to simplify your payroll process!