Effectively Manage Payroll in 2024 With Our Step-By-Step Guide
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- The payroll process involves collecting data, calculating pay, withholding taxes and deductions, and distributing funds accurately and on time.
- There are several ways to manage payroll depending on the size of your human resources team, their capacity, and the location of your workforce.
- Outsourcing your payroll will save valuable time and ensure you comply with payroll regulations.
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
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.
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?
Check out 12 Payroll Best Practices to Implement in 2023 to stay in the know.
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.
19 common payroll mistakes to avoid
Even though it seems pretty easy, you can make a lot of mistakes when paying your workers. To ensure a healthy and productive work environment as a payroll manager, you’ll want to avoid making these 19 most common payroll mistakes.
1. Miscalculating the payroll or paying the wrong amount
Providing both your employees and contractors with an accurate payroll is the basis of a good professional relationship. Ensuring you get the right amount for each payroll is a task and a half, but it needs to be done. It usually involves looking through a lot (sometimes even hundreds) of timesheets and ensuring that every one of them is proper.
Miscalculations with paying both your employees or contractors the right amount of money can lead to some serious issues.
First off, you can underpay your workers by accident. This means that you’ll be providing them with less income than they deserved. Apart from being very unprofessional, this can devastate an employee’s motivation.
Overpayment is also a serious issue when it comes to miscalculating payroll, which may be due to a simple data entry mistake. However, giving one of your workers more money than they’ve earned is a bad business model. Not to mention that it can seriously damage your company’s finances if it goes unchecked. This is especially true for smaller businesses.
2. Disregarding payroll taxes
Paying taxes is one of your most important tasks when you own a business. The government requires all businesses to pay federal income tax, employment taxes, as well as a variety of state or local taxes.
Missing any of these tax payments can cause problems with the IRS. And ignoring the payroll taxes will bring issues with both the IRS and the Department of Labor. Most of these taxes are collected on a pay-as-you-go basis. This means that one missed payment can result in severe fines, which relate to both big and small businesses.
3. Forgetting to send out tax forms or missing deadlines
Some payrolls are tightly tied to specific tax forms. Failing to submit these as soon as you hire an employee or contractor is a serious payroll mistake you should never make. There are a lot of necessary government forms you’ll need to submit, and some of them might be completely different from what you’re used to.
For example, the tax responsibilities when hiring foreign independent contractors will be pretty different than when hiring regular employees. Make sure you’re informed about what forms you need to have for new hires and when you need to submit them.
Many employers also fall into the trap of focusing on their payroll employees and completely forgetting about their independent contractors. Not sending the 1099 tax forms is one of the most common payroll errors companies make.
4. Being inconsistent or infrequent with payrolls
Managing something as challenging as payroll will put you in various unpredictable situations, especially if you have many employees or contractors abroad. Tackling global payroll is one of the main causes of frustration and inconsistency regarding payroll.
However, no matter which challenges you run into, a payroll provider should find a way to tackle them and provide a stable and consistent payroll for their workers worldwide.
5. Sending payments late
Businesses can be very unpredictable, and campaigns and product launches are usually late. However, there is one thing that should never be late: the employees’ salaries.
The payroll should arrive exactly at the predetermined pay period. This helps create trust and gives the people working for you a sense of stability.
Sure, the payday can be a bit late once or twice a year, but there should be a good explanation. And you should notify your teams in advance - don't keep your employees waiting!
6. Skipping payments
The only thing worse than a late salary is a salary that doesn’t come at all. Many employees and contractors alike would resign from businesses that do this at the first chance possible.
As a payroll manager, you should make sure that all of your workers receive their remuneration come payday.
A missed payday is not something that people working for you will take lightly. Also, it will demotivate your teams and create an unfavorable precedent. Not to mention putting a stain on the business’s reputation.
7. Misclassifying employees as independent contractors or vice versa
Before you put a worker on your payroll, you’ll need to classify the kind of work relationship your business has with them. You might need to submit a different kind of payroll depending on this predetermined relationship.
Treating an employee as a contractor or vice versa will cause serious problems down the line. Apart from different payroll policies, there are a lot of other aspects that differentiate independent contractors from employees. For one, employees get their contributions withheld from their salaries, which is not the case for contractors.
Not to mention that hiring full-time employees requires different tax forms from when hiring independent contractors. This misclassification is one of the more serious payroll mistakes that you’d want to avoid at all costs.
8. Miscalculating overtime pay or performance bonuses
Expecting your employees to work outside of normal working hours and not rewarding it is a serious mistake. It can demotivate your workforce or outright turn it away. This is why acts such as the Fair Labor Standards Act established the laws and regulations that require you to pay overtime to your employees.
There is no set overtime pay, but most employers decide to go with 150%-200% of the employee’s regular hourly rate.
Paying overtime wages to contractors is a bit more difficult. Since you won’t be tracking time for most contractors, it will be more difficult to determine when they went the extra mile. You can give bonuses when tasks have been completed quickly or especially well.
This is also applicable to your regular employees. If they do well, you should reward them through payroll or other means.
9. Misfiling gross and net payroll
This is a pretty basic mistake as far as payroll is concerned. It is really easy to avoid making it - it requires a bit of focus and practice. In some cases, it might be a challenge to calculate the net employee’s paycheck from their gross payroll. However, it is usually pretty straightforward. What is important is that you don’t get them mixed up.
Gross income is the amount your worker is due before deductions, subtractions, taxes, or contributions are withheld. Net income is everything an employee earned minus the taxes, contributions, or any other withheld expenses.
10. Failing to keep proper payroll records
Poor record keeping can cause both in-house problems and issues when tax filing or completing other external errands. To have a successful business, you need to keep records of everything, especially payroll records.
Proper record keeping will protect you legally and allow you to see the improvements or deteriorations in all the aspects related to your business. From business transactions and changes implemented to payroll, you need a record of it all.
11. Failing to compensate employees for work-related injuries
If an employee gets injured while at work and/or performing business activities, they are entitled to various types of compensation. Paid leave and covering medical expenses are just some of them. If you fail to provide these for your employee, whether right away or through a paycheck later on, your business can be sued.
12. Not staying up to date with laws and regulations
Apart from the FLSA, there are hundreds of regulatory Acts and Bills that deal with paying your workers. The most common laws like these deal with minimum wage and vacations.
However, no matter whether you’re paying an employee or a contractor, you’ll need to abide by some regulations. These will differ depending on your situation, business scope, and many more factors.
13. Failing to subtract garnishments from an employee’s payroll
While it may seem that taxes and contributions are the only things that you need to withhold from your employee’s salary, this is not the case. Garnishments such as debts, credit installments, and even mortgages, in some cases, should be deducted from the net salary before giving the employee a paycheck. Garnishments are a way to ensure the person receiving a paycheck pays their own debts.
Forgetting to remove the garnishments from your employee’s salary can cause both you and them many problems.
14. Not utilizing payroll software
We live in a digital age, and we can say with almost absolute certainty that there is an app for everything.
While an app on your phone might be too simple or insecure for time tracking or helping you run payroll, there is payroll software designed especially for that.
All you need to do is take some time to do data entry (such as the employee’s social security numbers or when they started working for you), and the software will do the rest.
- You won’t need to double-check everything all the time
- You could save money by keeping a smaller payroll department
- No need to go to the bank or pay salaries from a computer. The payroll software calculates and pays all the amounts
- It will save you a lot of time
These are just some of the advantages of automating your payroll system.
15. Rushing payroll and related paperwork
One of the most commonly overlooked payroll mistakes is paperwork. This especially becomes evident when processing new hires and getting them through the payroll process. The documentation is sometimes rushed to fill a job opening as soon as possible. This is a terrible mistake as it'll make your new employee feel completely disoriented. Not to mention data entry errors that may cause serious miscalculations down the line!
Avoid this mistake by planning each hiring process and investing the time to double-check the paperwork if necessary. This will ensure a better hiring process and faster payroll processing.
16. Forgetting about a holiday
If your paydays fall on fixed dates (for example, on Jan 4th, Feb 4th, and so on), at some point throughout the year, they may fall on a holiday. Banks will be closed on that day, so your payments will be at least a day late, which may cause dissatisfaction among your employees and independent contractors.
While this may not affect the payroll itself a lot, plan ahead and keep these days in mind to avoid being late with payroll processing.
17. Not including all taxable items when tax filing
Sometimes, employers only report the worker’s base pay and completely disregard other taxable items that must be included in the tax reports. That may cause serious legal trouble even if it was an honest mistake.
For example, stock options or different types of discounts you offer your employees are also taxable, and therefore, you need to report them to the IRS.
18. Not keeping your data safe
Whether you're outsourcing your payroll to a third-party service provider or you hire independent contractors to work on projects, you need to protect your confidential data from leaking. That involves your employees' personal data and payroll information. That's why it's essential to sign a DPA with any external collaborator.
Also, if you've decided to rely on technology, bear in mind that it's not perfect. A server may go down, your computer may get damaged. Ensure adequate backup for all your data and keep your payroll information in a secure environment and protected from hackers or any other issues.
19. Overburdening your payroll staff
Payroll services are usually related to a single department that works with the help of all the teams in the company to ensure everyone gets the right payroll at the right time.
However, no matter how well your payroll system works, this department is bound to get swamped sooner or later - keeping track of contracts, the number of hours worked, salaries, payroll taxes, days off, and more can really be overwhelming. This is why it’s necessary to alleviate your payroll staff's workload from time to time.
Small businesses especially suffer from this since there isn’t a proper department for payroll processing. This usually means that it falls to the business owner to go through endless timesheets and double-check employee hours for the entire workweek. Running payroll as a small business entails several challenges that require some expertise or help to tackle.
Run hassle-free payroll with Deel
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