A Guide to HR Payroll Systems
Processing payroll by yourself can be a tremendous task, and if you’re doing it for the first time, it’s essential to consult an expert before you start crunching the numbers. That’s because the challenge of processing payroll is what you miss, as missteps can lead to severe liabilities.
Regardless, you can still process payroll manually by using a tool known as a payroll register, which is a series of simple charts that includes employee information. Use the following 7 simple steps to complete your payroll duties by yourself or with a tiny human resources team.
Step 1: Find Your Employer Identification Number (EIN)
If you haven’t already, set up your EIN with the IRS. The IRS uses this number to identify your business. Applying for an EIN is free, and you can do so online on the IRS website. Once you’re approved, the IRS will instantly provide you with your number by email or weeks later by mail.
Step 2: Collect Tax Information From Employees
Employers can’t pay their employees without their relevant tax information. Employees must fill out a W-2 and an I-9, while freelancers or contract workers must submit a W-4, I-9, and 1099 documents. Both employment types have to declare their work status and info on these forms.
1099s have a different set of rules for how to prepare them for the IRS and your contractors. The majority of the work falls on the employees in this section, so you’ll only need to distribute the forms and collect them in time to finish your payroll duties and subsequent filling.
Step 3: Establish a Payroll Schedule
There are four types of payroll schedules: weekly, bi-weekly, semi-weekly, and monthly. Devote 30-minutes to looking up state laws about payroll scheduling, as some states only allow bi-weekly pay. Make sure your employees don’t go without pay for unreasonable periods.
Step 4: Calculate Gross Pay
Gross pay accounts for the total amount you owe your employees. Just add up the total amount of hours your employees worked in a pay period and multiply it by their hourly wage. Then, add their overtime pay (1.5x an employee’s hourly rate) after calculating their gross payment.
Use a spreadsheet or time-keeping software to track employee/contractor hours accurately.
Step 5: Calculate Withholdings, like Allowances and Deductions
To determine your employees’ net payment, which is what your employee will receive after deductions and allowances, refer to your employees’ W-4 or the contractor W-2 sheet just for allowances. Deductions should be present on their 1040-EZ form. Use both for payroll.
On top of exemptions and deductions, you also have to remove the following:
- Social Security
- Federal Taxes
- Local Taxes
- State Taxes
- 401(k) Contributions
- Medicare
- Workers’ Compensation
- Other included benefits
When stored meticulously on a spreadsheet, calculating net pay can take mere minutes. However, the first time you do payroll, this process will be time-consuming, and you may make a few mistakes. Speak to an HR professional to ensure you’ve done this step correctly.
Step 6: Hold On to Payroll Records for Three Years
Keep your payroll records on file for at least three years to ensure you can reference them if you’re audited, or you find a discrepancy. Proper bookkeeping is essential for payroll taxes, especially if you pay them out on a regular basis, so keep multiple copies of each document.
Step 7: Pay Your Payroll Taxes
Employers have to withhold taxes from their employees for income taxes, Medicare, and Social Security taxes. You may also have to pay FUTA, SUTA, SUI, and FICA taxes, and you can’t deduct these burdens from your employees. Make sure you have enough saved quarterly.
The IRS expects businesses to pay estimated taxes by April 15th, June 15th, September 15th, and January 15th every single year. It’s better to overpay. Otherwise, you’ll be audited.
Authored by Sari Cada, Paradigm Digital Ltd