Payroll Checklist: 10 Steps to Process Payroll

A complete payroll checklist: 10 steps to process payroll

To process payroll completely, from time tracking through tax deductions, take the following steps:

1. Apply for federal, state and local employer identification numbers.

Before processing payroll, a small business must have an employer identification number (EIN). Without this identifier, you can’t make federal payroll tax payments. In addition to a federal employer identification number, state and local equivalents may also exist. Consult business law and tax experts in your area to find out for sure.

2. Register for federal and state withholding accounts.

Once you’ve received an EIN, you should create four key federal and state withholding accounts. For federal tax payments, you’ll need an Electronic Federal Tax Payment System (EFTPS) account. For state tax payments, you’ll need a state unemployment insurance account. On a state level, you’ll also need a new-hire reporting account and a workers’ compensation account (though the latter may vary by state).

3. Collect employee tax information.

With your identifying and tax payment information all set, you can now collect your employees’ tax information. To do so, have your employees file a completed IRS Form W-4 and your contractors file a completed IRS Form W-9. In addition to these payroll forms, you’ll also need to collect USCIS Form I-9 to verify your employees’ U.S. employment eligibility.

4. Set up your employee payment infrastructure.

Once you’ve taken care of all things government-related, you can set up the systems to pay your team. This process starts with determining the frequency of pay periods, knowing how often you’ll need to remit taxes, and setting up direct deposit for employees. For most small businesses, it also means choosing a payroll service to calculate and pay wages and taxes.

5. Verify employee information accuracy.

Start your payroll run by confirming whether your employees’ information remains accurate. Doing so could mean checking whether those who are classified as employees are indeed employees and not independent contractors. It could also mean checking whether wage garnishments are necessary, if home addresses have changed and if salaries have been raised. As long as all your records in all your systems are consistent, you can assume your information is accurate.

6. Calculate employee gross wages.

Your employees’ gross wages are what you pay them before you deduct any taxes or benefit contributions. Correctly calculating them is critical to any successful payroll run. The good news is that these calculations are often quite easy, even with bonuses, commissions, tips and expense reimbursements in the picture.

7. Calculate employee net wages.

For contractors, gross and net income are the same. Things work a bit differently for employees because you’ll deduct payroll taxes from their checks. You may also need to withhold benefits contributions. If you must deduct benefits contributions, do so after calculating taxes. You must calculate taxes based on the total wages you pay employees, not what remains after deducting benefits contributions.

You’ll often see the taxes you pay on employees’ wages loosely grouped as payroll taxes. In reality, these taxes fall into several different categories, including the following:

• FICA taxes: Employees and employers pay FICA taxes in equal amounts. That amount is 6.2 percent of the employee’s gross wages for Social Security tax and 1.45 percent for Medicare tax. 
• FUTA and SUTA taxes: Federal unemployment taxes (aka FUTA) are levied at a flat rate of 6 percent on the first $7,000 of an employee’s wages. However, if you pay your state unemployment taxes (SUTA) on time, you can potentially lower this 6 percent rate to 0.6 percent. Your SUTA rate will vary based on your state and several other factors.
• Additional federal and state income taxes: The information your employees share via their W-4 forms determines their federal income tax rates. Each state has its own additional tax rates you’ll need to factor into your calculations. In some cases, municipalities also have tax rates. On the other hand, some states and localities have no income taxes whatsoever. Consult your local tax authority or a small business lawyer to learn more.

Examples of deductions you might take from an employee’s paycheck after calculating taxes include health insurance premiums, retirement account contributions and health savings account contributions. Note that some 401(k) plans are pretax, which affects how you factor them into employee paycheck calculations. 

8. Review all your calculations.

Earlier in this process, you verified that all the employee information you used for your calculations is correct. Now, you must check all calculations for accuracy. To do so:

1. Verify that all numbers involved in your calculations are correct.
2. Rerun each calculation. If you see the same results a second time, you can assume everything is correct and good to go.
3. If not, review all your information for errors.

Errors may stem from discrepancies in your records. Perhaps your payroll software records a different salary for a particular employee than what’s noted in your accounting or staffing records. Investigate discrepancies with your employees and the team members responsible for keeping your records, correct everything accordingly, and rerun your calculations. You should now get the correct numbers.

9. Pay your employees.

After verifying your numbers, it’s time to cut checks or initiate direct deposits. Paying via paycheck can mean breaking out your checkbook or printing paychecks from your computer. In some cases, it can also mean having a third-party company send checks to your employees. Direct deposit is typically more straightforward, as it’s either automatic or something you can trigger with just a few clicks after entering and verifying payment amounts.

10. Allocate withholdings.

When you pay employees, you should also allocate the money you’ve withheld from their checks to the proper accounts in your ledger. Chances are you remit your taxes quarterly, not every pay cycle, so you should store your payroll tax withholdings in your tax account until then. 

Similarly, if you’ve withheld money for benefits contributions or premium payments, you should move this money to whatever account you use to cover these costs. If you use payroll software, this allocation and everything else in your payroll process will happen automatically.

Faster payroll processing with payroll software

Although the above steps aren’t necessarily complicated, they’re undoubtedly time-consuming. However, payroll software and services automate these processes for you. You’ll only have to handle steps one, two and four above exactly once and give your employees self-service access for step three. From there, your platform can completely execute your payroll with no input from you – and no human error – every payday.

Best payroll software

If you’re interested in streamlining your payroll with one of the best payroll services but aren’t sure where to start, here are a few excellent options for small businesses: 

• ADP: ADP is a leader among payroll services in executing complex payrolls, including calculating all payroll taxes. Our ADP payroll review explains how this platform automates payroll and tax filing services and can sync your time and attendance information.
• OnPay: OnPay specializes in payroll for very small businesses. It calculates your payroll taxes and integrates with many of the best business accounting software platforms. Our review of OnPay payroll software details how payroll data automatically updates in your accounting software every time you run payroll. 
• Gusto: Gusto can help you manage payroll and payroll tax filings, and it also offers a wealth of additional HR services. Our Gusto payroll software review shares how this platform supports automated or manual payroll anywhere in the U.S. for employees and independent contractors.  

Review your payroll checklist so nothing slips through the cracks

Payroll software can automate many things, but you still must address some items, such as verifying employee information. No matter how well your payroll software works, incorrect calculations can still happen. Referring to your payroll checklist each time helps you keep a close eye on things and truly understand how payroll works. That way, nothing gets missed on your end, and your employees will have no trouble receiving compensation for their hard work. 

Natalie Hamingson contributed to this article.