According to the Bureau of Labor Statistics, U.S. payroll employment increased by 263,000 in April of 2019, and unemployment fell to 3.6 percent. With such a high percentage of the country employed, many business owners are wondering how to do payroll most efficiently.
It’s an undeniably imperative business function, and knowing how to do payroll properly will help avoid penalties.
Furthermore, your employees will have greater respect for you. When your employees know they can expect reliable payments for each pay period, they are more apt to trust you.
If you run into payroll snafus, however, their trust will erode and your team could unravel. So, what exactly do you need to do?
What Exactly Does Payroll Entail?
Those who haven’t yet learned how to do payroll often don’t fully understand what it entails.
On the surface, it may seem like it’s little more than writing checks or approving direct deposits on a weekly, bi-weekly, or monthly cycle.
But there’s a lot more to it than that. In addition to making payment transactions, payroll necessitates accurate accounting, time-card records, tax forms, withholdings, employee information, and much more.
How To Do Payroll Without Negatively Affecting Your Business
The easiest way to know you’re doing payroll without negatively affecting your business is also the most expensive way: hire an accountant.
Seeking the help of a qualified and reputable account will ensure you cross all of your T’s and dot your I's when it comes time to file taxes.
Sadly, this option isn’t available to every business, especially small businesses with tight budgets.
The good news is there are other options for how to do payroll if you can’t hire an accountant.
How To Do Payroll The Manual Way
The first way to learn how to do payroll properly is the manual process, whereby you see that each form is filled out on time.
You will have to manually submit your filings to the IRS at the end of the year.
1. Ensure all employees fill out the right forms
If you want to know how to do payroll manually, the very first step is filling out W-4 forms.
You need to ensure that all of your employees accurately fill out their W-4 and submit it promptly.
The W-4 demands crucial information that helps identify the employee. Information the W-4 demands includes name, address, filing status (single, married, etc.), social security number, and when the employee was hired.
It allows employees to frame the structure of their filing with personal allowances, adjustments, and additional income.
Additionally, this form allows employees to claim deductions and take advantage of tax credits.
Businesses require this form to be filled out as soon as possible. It's usually part of the on-boarding procedure when a new hire is admitted to the company.
If your employee doesn’t have this form submitted, they can face a myriad of problems with the IRS.
2. Ensure all contractors fill out the right forms
Sometimes businesses hire employees who either don’t work full time or work on a project basis.
These types of employees don’t usually draw salaries and may only work on a short-basis.
Freelancers and contractors fall under this category and need to fill out a special tax form that is different from the W-4.
Instead of a W-4, contractors and freelancers need to fill out a 1099 form.
Similarly to the W-4, this form serves to identify a taxpayer with a TIN, or Taxpayer Identification Number.
This form helps to round up and declare any miscellaneous income a taxpayer has received in the last year.
Apart from freelancing and contracting assignments, other forms of income include rents, royalties, insurance proceeds, and other income.
If your business frequently employs contractors and freelancers, make sure they fill out this form before they start working for you.
3. Apply for the right credentials
For a business to legally pay employees in the United States, that business must first have an EIN, or Employer Identification Number.
If you’re just starting a business and lack an EIN, you will need to apply for one online with the IRS.
Just as a social security number identifies an individual taxpayer, an EIN identifies your business to the IRS.
Even tax-exempt organizations like churches or non-profit organizations must apply for an EIN.
Startups and established businesses alike will want to consider getting insurance along with an EIN.
Though not a requirement, it would be pretty foolish to forgo completely.
For instance, to complement health insurance, many physically demanding organizations get insurance for workers compensation programs.
4. Make prudent calculations
Learning how to do payroll correctly isn’t as easy as having employees fill out a couple of forms, unfortunately.
On your end of things, the business needs to make prudent withholding calculations too.
Withholdings are the sums of money taken from an employee’s paycheck and paid to the government as income tax on behalf of the employee.
To help plan ahead and avoid any nasty surprises at the end of the tax year, the IRS provides a withholdings calculator.
Be aware, though, that you don’t only need to be concerned with the employees’ tax withholdings; you must also plan for the employer’s taxes as well.
5. File documents
The next step to how to do payroll correctly is learning how individuals and businesses file taxes differently.
You likely know that individuals pay their taxes in April. But businesses file their taxes at various times throughout the year depending on their needs.
Believe it or not, many businesses choose to file at the end of the calendar year on December 31.
Also, note that some businesses may choose to file taxes much earlier in the year because the business only operates on a seasonal basis.
For example, a lawn mowing and landscaping business may choose to file in the fall because they don’t operate in the winter months.
6. Pay taxes
A guide for how to do payroll completely wouldn’t be complete without the final step of actually paying the taxes.
If you’ve followed the steps and learned how to do payroll properly, there shouldn’t be any big surprises or hidden costs.
Your withholdings should cover the cost of your employees aggregate tax obligations.
Additionally, you also need to prepare and file W-2 forms, which are a wage and tax statement.
Essentially, this form keeps track of all the money the employer paid to the employee over the year and requires a lot of information.
In addition to the employer’s identification number and the employee’s identification information, the form outlines social security and Medicare wages, state income tax, local income tax, and more.
If you find physical paperwork tedious and irritating, you can choose to file online with IRS e-file options.
How To Do Payroll The Easy Way
Learning how to do payroll the manual way is an intensive process that requires significant investments of time and energy.
Most business owners, especially small business owners without an in-house accounting team, don’t have spare time and energy to devote to the tediums of payroll and taxes.
Fortunately, there is more than one way to skin a cat, and it isn’t necessary to do manually (though it is cheaper).
To save time – but not money – a business can opt to use a third-party payroll and tax service.
Some services do use actual application software installed on a computer. Keep in mind, most of the services are cloud-based and can be run straight from your web browser.
Naturally, cloud services are more convenient because you don’t have to engage in time-consuming software installations, and the service’s web portal can be pulled up on your mobile devices too.
Third-party services like Gusto and ADP are a godsend for small business because they only charge an affordable monthly fee.
1. Do your research
The first step in learning how to do payroll through a third-party service is to do your homework.
You need to spy out the payroll service landscape and make a comparison of the best services.
Most services have competitive rates, but some services can accommodate varying sizes of businesses better than others.
If you’re a small business, signing up for a basic plan that only covers businesses with nine or fewer employees may be appropriate.
However, not all payroll services have packages that small, so you’ll have to shop around.
Furthermore, be aware that these services have different package structures with varying features.
For example, some services include 24-hour direct deposit and same-day direct deposit – and some do not.
Note that many of these services do more than payroll. Some of them even incorporate comprehensive HR support as well.
If you’re not sure which service to choose, then I would recommend taking one out for a test drive.
Some services, like Patriot Software, offer a free 30-day trial so that you can try it before you buy it.
2. Data entry tasks
How to do payroll correctly with an external third-party service varies a little depending on the service you choose.
The software, web forms, and interfaces are different. The first task once you have signed up with a service is inputting all of your employees into the system.
You’re going to need to enter the same information required by the IRS’s paper forms. However, things go much faster and aren’t as messy when you go paperless.
If you’re a brand new business and haven’t hired too many employees, things will go quicker than an established business overhauling their payroll services.
Asking employees to once again provide their tax and wage information can feel like pulling teeth. But in the long run, things will be more efficient.
Note that this stage of the process is where you collect bank and routing numbers for employees that opt for direct deposit.
3. Keeping track of the past
The next step to learning how to do payroll with an external service is to track the time contractors and employees spend working.
Most cloud payroll services have a time-card layout that tracks the hours and dates in which employees worked.
This step is crucial because the United States government demands that businesses maintain records of wages and time-cards for two years.
Also, having records protects you and your business as much as it does your employees, too.
If an employee were to come squabbling about how they got “cheated” and didn’t get paid enough money, you have records to confirm or deny the legitimacy of their claim.
In such a situation, keeping these records could even be an asset if you had to defend your business in a lawsuit.
4. The most important step
How to do payroll correctly with an external provider is a lot easier than manually doing things on your own.
After you have entered all your employees' information into the system and clocked their hours, it’s time to hit the “submit” button and run your payroll.
This step of the process is when the service makes a transfer of money from the business to the employees.
From the employee’s perspective, it’s payday! When running your payroll, note that it’s imperative to stick to a set schedule.
There isn’t any wiggle room to process payroll late. Your employees depend on you to meet payroll deadlines.
Adhering to a strict schedule not only helps instill trust within your employees, but it also makes things more efficient.
For instance, scheduling payments once or twice a month reduces the payroll tasks you would otherwise have to do with a weekly payment schedule.
Getting Your Ducks In A Row Before Tax Season
Learning how to do payroll correctly is no easy task, especially if you’re a brand new business owner.
If you don’t have the time to learn the ropes on your own and don’t have the capital to hire an in-house accounting team, using a third-party service may be the only viable option.
Nevertheless, if you only have a handful of employees, choosing to do payroll and taxes on your own can save money.
Just remember: planning is key. You need to look ahead and see what’s coming down the road. That way you aren’t in a bind when the taxman comes calling.
If these tips helped you get your ducks in a row before tax season, feel free to comment below.