
How to Do Payroll: A Step-By-Step Guide to Manage Payroll

Key Takeaways
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How to do payroll in eight steps
Follow these steps to create a streamlined and legally compliant payroll system:
Step one: Gather all the relevant business information
Before you can process payroll, you need to gather all the necessary data. The data will differ slightly depending on the country where your company is based.
If you’re based in the US, for example, you will require the following date:
- Employer identification number (TIN): The IRS assigns businesses unique, nine-digit identification numbers. It functions as a business’s social security number, and distributing payroll is impossible without it.
- Local tax ID: Some states require a separate local state tax ID to pay state-specific taxes. The local state government issues this ID.
Step two: Gather all the relevant employee information
Next, collect your employee’s tax information and accompanying tax forms. Again, the tax information will differ depending on where you’re based.
If your business is based in the US, you will need the following:
- Employee’s Identification Number (EIN)
- Social Security Number (SSN)
Step three: Choose a payroll schedule
- Monthly
- Semimonthly
- Biweekly
- Weekly
Step four: Choose your payment method
A more modern payment method is via payroll applications. Employers can send funds directly into an employee’s digital wallet, cutting salary payment processing times and providing employees with flexible withdrawal methods.
Learn about alternative payment methods such as cryptocurrency payroll and how long these alternative payroll processes take.
Looking for flexible global payment methods?
Offering your team multiple payment options attracts a bigger talent pool. See how we solve global payroll for international teams.

Step five: Calculate each employee’s gross pay
How you calculate an employee’s gross pay depends on whether they are salaried employees or receive an hourly wage.
To pay hourly employees, you must track the total number of hours worked and calculate their pay for every pay period, as their earnings may vary. You will need to check timesheets for their standard and overtime hours and multiply this by the pay rate.
Be cautious of overtime laws. Exempt employees are not entitled to overtime pay, while non-exempt employees must receive overtime pay at a higher rate than regular hours.
You must also factor in additional bonuses, commissions, profit shares, merit pay, and incentives when calculating remuneration.
Learn more about the different types of employee compensation.
Step six: Subtract payroll tax deductions and withholdings
Next, it’s time to subtract payroll deductions and file them with the local authorities. Employees will require different deductions depending on their pay frequency, withholding allowances, and benefit entitlements.
In the US, The most common deductions are as follows:
- Federal income tax (FICA): The FICA tax rate is 15.3% of the employee’s pay
- Social security tax: 12.4% for Social Security
- Medicare taxes: 2.9% for Medicare health insurance
- State and local taxes: Some states and municipalities have additional payroll taxes for short-term disability, paid family medical leave, or other programs. Employers should check with their local authorities for specific requirements.
- Voluntary deductions: Voluntary deductions are amounts which an employee has elected to have subtracted from gross pay, such as retirement plan contributions, life, and dental insurance
- Wage garnishments: The state, IRS, or even private organizations can garnish employees’ wages to collect any unpaid debt, such as:
- Spousal or child support
- Federal or state tax levy
- Creditor garnishment
- Student loans
How do I file taxes?
You can only make business tax deposits in the US using the Electronic Federal Tax Payment System (EFTPS). If you choose to pay via credit card, you might have to pay some fees, while direct deposit doesn’t charge any extra cost.
Do I need to deduct Federal Unemployment Tax?
Is employee compensation tax deductible for the business?
Do I need to make deductions for independent contractors?
Step seven: Fund payments to your employees and distribute pay stubs
You will need to distribute electronic payslips to each employee for their records.
Step eight: Keep meticulous payroll records
The term ‘payroll records’ refers to any form or documentation collected or produced for processing payroll. These records include things like:
- Collective bargaining agreements
- Wage rate increase forms
- Timekeeping logs and timecards
- Tax withholding forms
What’s the best way to run payroll?
Manually in-house
Check out 12 Payroll Best Practices to Implement in 2023 to stay in the know.
Automated in-house
Automation makes in-house payroll significantly easier while saving time and increasing overall accuracy. Check out our Payroll Automation Guide to learn more.
Outsourced to a local payroll provider
Hiring a third party to take care of your company’s payroll ensures that all payments are accurate and timely and that all your payroll paperwork is in place.
Check out The Complete Guide to Payroll Outsourcing to learn more.
Outsourced to a global payroll provider
Outsourcing your global payroll saves you time and ensures you stay compliant with payroll regulations no matter where your employees live.
Run hassle-free payroll with Deel
Sound like something your business could use? Reach out and book a demo to see Deel in action.