10 Steps to Manage Payroll
One of the most important responsibilities that business owners have is ensuring that payroll is accurate. Managing payroll properly streamlines the ability to comply with federal, state, and local tax laws and regulations. It also ensures that employees are paid on-time, while protecting the company from incurring penalties from the Internal Revenue Service.
Unfortunately, managing payroll isn't a matter of simply purchasing a software solution and sending out a check every two weeks. Rather, there are a series of steps to take before a company can begin to manage payroll efficiently and accurately. Learn about these steps and why each is an absolute must in the process.
1. Obtain an Employee Identification Number
Every business needs to apply for an Employer Identification Number, or EIN. An EIN is a unique 9-digit number assigned by the Internal Revenue Service to every organization operating within the United States. Utilized for payroll and tax reporting purposes, EINs can be applied for online, fax, or by mail.
2. Know Local Regulations
The business may also need to apply for other identification numbers beside the EIN. Most states require organizations to apply for a State Tax Identification Number that is utilized for filing taxes and hiring employees. If the business plans to operate within two or more states, then they need a State Tax ID to file taxes for those states as well.
3. Identify Employee Statuses
Businesses must identify how they plan to pay their employees. For example, independent contractors are treated differently than regular employees, so although they sign a work contract, independent contractors are technically self-employed. They do not receive medical benefits, paid time off, or other perks that come from regular employment at a company.
Determine whether employees will be independent contractors or regular employees by considering the following-
- Does the company control when or how the individual completes his/her work?
- Does the company pay for employee tools, such as computers, desks, or other supplies?
- Do employees have continued employment, or are they just working on one project?
- Does the company offer benefits to employees?
When hiring employees, make sure to collect the proper payroll and tax forms. These include-
- W-4 Tax Filing Form Form that gives employees information for income tax withholding from their paychecks
- I-9 Form Documents the eligibility of new employees to work in the United States
- 10-99 Form An Internal Revenue Service form that is utilized by self-employed contractors or independent contractors hired by a business
- Job Application Form Contains information about employee that can be verified, such as previous employers and education
Payroll can be weekly, biweekly, or monthly. Check local regulations to see if the business is required to utilize one of these three pay cycle methods. Fewer pay periods equates to less work for the payroll staff. However, many employees prefer a weekly or biweekly pay schedule, as it can help them get a better handle on their personal cash flow.
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6. Implement Adequate Payroll Processes
Identify how the company plans to track employee time attendance. Traditional timekeeping options include sign-in sheets or punch cards. Newer technologies, such as biometric time clocks, utilize facial or fingerprint recognition systems to identify an employee and record punch-ins.
Also, determine what the company's paid time off policies are. Establish which hours are paid, which aren't, whether there is paid vacation or unpaid leave.
Ensure there is a way to track and account for overtime hours, as well. Neglecting this part is the catalyst for fines, penalties, and hefty lawsuits.
7. Choose Payroll Software
There are many different programs that help make it easier to process payroll.
Human Resource Management systems (HRMs) are software that integrates all common HR functions into one centralized database. HRMs may be useful for larger enterprises as they automate the payroll process and help to ensure labor law compliance.
If the company doesn't want to purchase a software system, they can outsource the work to a payroll service. This may be useful for small business owners who have limited time and resources.
8. Process Payroll
After a payroll system is chosen, it's time to process payroll. The process may vary depending on the software, but there are a few general guidelines-
- Review Employee Hourly Schedules Calculate total hours for hourly employees
- Determine Overtime Pay Ensure accuracy of overtime hours for each affected employee
- Calculate Gross Pay Sum of total hours worked multiplied by hourly rate
- Determine Deductions Deductions depend on federal taxes, social security, state taxes, local taxes, Medicare, 401k contributions, or workers contribution
- Calculate Net Pay Take the gross pay and subtract the deductions to determine how much the company will pay out to each employee
- Issue Payments to Employees Send money through direct deposit, check, or mail
Taxes will need to be submitted annually to both the state and the federal governments. Make sure that there is a software system in place that can protect and back up any data that pertains to every employee who worked there during the year. This also includes employees who briefly worked with the company.
10. Pay Taxes
Make sure to submit taxes as required. Money taken out of the employees' paychecks, along with the company's contributions must be remitted properly to the state and federal government.