If your business has employees, then you’ll need to pay them through payroll. Payroll is the process and system for paying your employees each pay period. There are three main parts of running payroll typically: keeping employee records, calculating each employee’s paycheck, and issuing paychecks.
We’ll go over on each of those components in more detail below.
1. Keeping employee payroll records
Well-kept employee records are crucial to accurately paying your employees what they’re owed. You’ll want to keep detailed records about your employee’s salary or hourly rates and the time they worked. More specifically, be sure to track:
- Current pay rates;
- Actual hours worked;
- Any overtime or double overtime worked;
- Paid time off used;
- Non-paid time off used; and
- Tips received (if a tipped employee).
All that information is key for the next step: calculating what they’re owed.
2. Calculating each employee’s paychecks to run payroll
Once you know how much your employees worked for the pay period, next comes calculating their actual paycheck for that pay period. Check out this article on how to calculate a paycheck for the formula you need to use to do that.
Calculating an employee paycheck typically includes taking out:
- Federal, state, and any local income tax withholdings, which depends on how many allowances they elected on their W-4.
- Employee pre- and post-tax deductions, like FICA taxes;
- Employer-paid taxes;
- Any employer contributions, like an employee’s 401(k) or health insurance policy;
- Any employee contributions, like to a health insurance policy;
- And any other local or applicable taxes.
Important note here: Be mindful of which state your employees work in. If they work in a different state, then you will have to withhold any applicable taxes from the state in which they reside, not where your work is located.
3. Issuing paychecks: the last step of payroll
Last up is actually issuing their paychecks or electronically depositing the money into their bank accounts if you use direct deposit. The paychecks or payment is typically given to employees on their payday, and that date is dependent on the pay schedule you use.
That wraps up the three main components of payroll. Now, managing and running payroll is complicated, so it’s best to have a CPA or automated payroll provider run everything for you to help avoid errors.Updated June 6, 2018
This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.