Do you have employees at your business? If so, you need to know how to run payroll. It’s important to be familiar with the steps you take to pay employees. Once you have a basic understanding of the process, you can use software to run payroll online in a few simple steps.
Before running payroll for small business
Before you run payroll, make sure you know the following employer and employee information.
Employers must set up identification numbers and accounts before running payroll, including:
- State registrations
Register with the IRS for a Federal Employer Identification Number, or FEIN. You will use the FEIN to pay employment taxes. Registering for an FEIN is free and can be done by phone or online.
Check with your state for local employer laws and accounts needed. Every state has a different set of rules for employers. You might need to register for state tax accounts. Check out the required payroll information for employers in your state.
Before running a payroll, you need employee information such as:
- Worker classification
- Payment information
- Form I-9
- Form W-4
Determine worker classification. An employee can be exempt vs. nonexempt. An exempt employee must be salaried, earn at least $23,660 per year or $455 per week, and have an executive, administrative, or professional role. Exempt employees do not receive overtime pay no matter how many hours worked.
Decide how you will pay the employee. Your employees can be paid salary vs. hourly. With a salary, employees are paid a fixed amount spread out over a year. With hourly wages, employees are paid a rate for each hour worked. You must also choose how many hours the employee will work, whether they get paid time off, and the pay period.
Fill out Form I-9. Form I-9 is a federal form used to verify the employee’s eligibility to work in the U.S. The employee fills out the first section, and you fill out the second section. Use the information on Form I-9, such as the employee’s full name and address, to run payroll.
Have the employee complete Form W-4. Employees can claim withholding allowances for taxes on Form W-4. The personal allowances lessen the amount of taxes taken out of their paychecks. Use Form W-4 to withhold payroll taxes.
Step 1: Enter payroll
Your first step in running a payroll is to enter the payment information. You need three details each pay period:
- Employee information
- Pay period
- Gross wages
You can find employee information on Form I-9. If you pay with direct deposit, you need the employee’s bank account information as well.
You should be running payroll regularly to compensate your employees. How often you run payroll is determined by your employees’ pay dates. Usually, pay frequencies are weekly, bi-weekly, semi-monthly, or monthly.
To run payroll, enter the pay period dates and the pay date. You should run payroll a few days before the pay date to allow for processing time.
Find gross wages
Running payroll starts with finding an employee’s gross wages. Gross wages equals the amount earned before taxes and other deductions are taken out.
Gross wages for hourly workers
For an hourly employee, you need the pay rate per hour and the number of regular and overtime hours worked. To find the gross pay, multiply the number of hours worked by the pay rate.
For example, an hourly employee worked 80 hours in a two-week period. Their hourly rate is $20 per hour.
80 hours X $20 = $1,600
The gross pay is $1,600.
If an employee is eligible for overtime, the overtime rate is their regular rate times one and a half.
For example, an employee makes $20 per hour. They worked four hours of overtime.
$20 per hour X 1.5 = $30
The overtime rate is $30 per overtime hour.
$30 X 4 overtime hours = $120
The gross overtime pay is $120. This amount is in addition to the regular wages. Using the previous example with $1,600 in regular hours, the total gross pay for the employee would be $1,720.
Gross wages for salary workers
For a salary worker, you need the salary per pay period and hours worked. Usually, salary workers are exempt from overtime. If a salaried worker is nonexempt, track and pay overtime hours.
To find the salary per pay period, divide the annual salary by the number of pay periods in a year.
For example, an employee has an annual salary of $60,000. You pay the employee monthly.
$60,000 / 12 months = $5,000
The employee receives $5,000 per pay period.
To run payroll quickly and accurately, consider using basic payroll software. The system will make payroll calculations for you. The software will also keep track of increases in pay rates, time off, and vacation time used. Here is what a screen might look like for entering employee hours:
Step 2: Deduct taxes and other withholdings
After entering payroll, your next step is to take out taxes and other payroll deductions. As an employer, you must pay, withhold, and remit payroll taxes. You might also need to handle other deductions from employee pay.
Wages can be taxed at the federal, state, and local level. The following are common payroll taxes:
- Employee and employer portions of FICA
- Federal income tax
- State and local income taxes (if applicable)
FICA (Federal Insurance Contributions Act) tax includes Social Security and Medicare taxes. For FICA tax, you must withhold a percentage of employee wages. And, you pay a matching percentage of each withholding.
Federal income tax is withheld from employee wages. You do not pay an employee’s federal income tax. The employee’s income tax rate is based on the number of allowances claimed on Form W-4.
FUTA (Federal Unemployment Tax Act) tax funds the federal government’s oversight of state unemployment programs. You do not withhold FUTA tax from employee wages. You must pay FUTA tax.
SUTA (State Unemployment Tax Act) tax funds state unemployment programs. Each state has different requirements. Do not withhold SUTA from employee wages. You must pay SUTA tax.
Make sure you have made all deductions for each employee before moving on to the next step. Have the right amount of taxes set aside to pay government agencies.
If you use payroll software, you only need to enter deductions the first time you set up an employee and when the deduction changes. A payroll service will handle your payroll taxes for you.
Step 3: Approve payroll and pay employees
Before you pay an employee, double-check the information you entered is correct. It can be a hassle for you and an employee to correct an error on a paycheck. Once you’ve verified the information, approve payroll.
After payroll is approved, distribute wages to your employees. You can choose from multiple types of payment for your employees, such as with a check or direct deposit.
You can print or handwrite employee paychecks. Software lets you print payroll checks on check stock after entering payroll. You can also use software calculations to handwrite checks and keep payroll records.
Often, payroll software includes a direct deposit option. One of the biggest benefits of direct deposit is that wages are automatically deposited into the employee’s bank account once payroll is approved.
How to run payroll: Recap
As a small business owner, you have a lot of tasks to manage. Don’t allow learning how to run a payroll slow you down. To make payroll a smooth process, get familiar with the three steps it takes to pay an employee:
- Enter payroll
- Deduct taxes and other withholdings
- Approve payroll and pay the employee
Using payroll software gives you an efficient way to run payroll. Consider using basic payroll software to automate the process and pay employees quickly. And if you don’t want to handle payroll taxes, let full service payroll do it for you.
Try Patriot’s payroll software to complete payroll in a few simple steps. Or, use our full service payroll and let us handle your payroll taxes. We offer free setup and support. Try it for free today.