Category: Human Resources

Contractor payroll is an organized process that enables you to pay independent contractors and freelancers. It is an essential procedure for you if you hire people to perform services for your business. An independent contractor is a temporary employee, while a freelancer is a self-employed, nonpermanent worker.

Learn how to manually complete the freelancer payroll process in six steps. Find out how to pay contractors using Square Payroll in three steps. Discover which one is easier: processing payroll manually or using software like Square Payroll.

How To Complete Contractor Payroll in 6 Steps

The payroll process for independent contractors and freelancers is different from the payroll procedure for employees. You can conduct the freelancer payroll process using a manual method. Follow the steps below:

Contractor Payroll Process Summary

Step 1: Make a Payment Agreement

Establish payment rates, payment periods & tax requirements of contractors

Step 2: Request W-9 Forms

Require freelancers to submit Form W-9

Step 3: Record Contractor Data

Input the personal data, tax information & bank account details of contractors

Step 4: Compute Contractor Payments

Calculate payments at the end of each cycle

Step 5: Make Contractor Payments

Use your preferred method to pay contractors

Step 6: Submit 1099-NEC Forms

Fill out Form 1099-NEC for all contractors paid over $600 within the year

Step 1: Make a Payment Agreement

First of all, make a clear payment agreement with contractors and freelancers. Temporary workers are not paid a regular salary like permanent employees. Instead, they are compensated based on the projects they completed or the time they spent working. That’s why you should determine three factors at the beginning of the process:

Payment Rates

How much should you pay the contractor? On one hand, each freelancer has his or her own standard rate as a professional. On the other hand, you have your own budget as a business owner for hiring a freelancer for the job. Together, settle on an hourly, weekly, monthly, or per-project rate that meets your mutual requirements.

Payment Period

How often should you pay the contractor? Establish the frequency of payment, whether it be weekly, bimonthly, or monthly. Estimate the period of time that you expect the person to be working for your business. Predict the approximate working period based on the length and complexity of the projects or tasks you hired the worker to perform.

Tax Requirements

What are the tax requirements of the contractor? Most contractors pay taxes independently so you do not need to withhold taxes on their behalf. Keep this in mind as you negotiate payment rates with freelancers.

Step 2: Request for W-9 Forms

Ask the contractors and freelancers you hired to fill out a Form W-9 before they start working for your business. This Internal Revenue Service (IRS) tax form is also called Request for Taxpayer Identification Number and Certification. It requires workers to provide their name, address, federal tax classification, and Taxpayer Identification Number (TIN).

The W-9 form is a requirement for U.S. citizens and permanent residents whom you employed on a contractual or freelance basis. You need this form to report the annual earnings of temporary workers via the Form 1099-NEC at the end of every year.

Step 3: Record Contractor Data

Manually input the personal and tax information of your contractors in your payroll system after they submit the Form W-9. Save the banking details of the freelancers if they opt for direct deposit. Record the data in the payroll system of your business via paper records or computer spreadsheets to make accurate payments and deposits to your freelancers.

Step 4: Compute Contractor Payments

Calculate the payment of your contractors at the end of each weekly, bimonthly, or monthly payment cycle. Compute the amount based on the freelancer rates multiplied by the number of hours they worked or projects which they completed within the period. You may perform computations using a manual calculator or a digital spreadsheet.

Step 5: Make Contractor Payments

Select the payment option that works best for you and your contractors. Make a payment based on your preferred method:

• Direct deposit: You can deposit the payment straight to the bank account of the contractor. Take note that direct deposit processes usually take a few days to complete.
• Cash: You may pay contractors in cash in case they currently don’t have a bank account.
• Check: You can print checks which you can mail to your contractors or hold in the office for pickup.
• Prepaid debit cards: You can issue pay cards to your freelancers which you can reload during each payday.

Step 6: Submit 1099-NEC Forms

Fill out and submit a Form 1099-NEC for every contractor who received over $600 from your business during that year. Indicate the total amount you paid annually to each person. Submit copies of the form to the IRS and state tax agency. Furnish the contractor with a copy so they can compute how much in taxes they owe. Keep a copy of each form for your business records as well.

How to Process Contractor Payroll Using Square Payroll in 3 Steps

As an alternative, you can use Square Payroll if you want a more convenient method to complete the freelancer payroll process. We recommend this online payroll software because it lets you make contractor payments in a faster, easier way.

Square Payroll is best for small businesses that hire contractors because of its useful features and seamless integrations. Follow the steps below to begin using Square Payroll:

Square Payroll Process Summary

Step 1: Add Contractors to Square Payroll

Register contractors in the software system

Step 2: Prepare Contractor Payments

Select the pay period dates & payment method + Input contractor rates, hours & commissions

Step 3: Make Contractor Payments

Review data & submit payments

Step 1: Add Contractors to Square Payroll

Click on “Add Team Member” and “Create New” to register new independent contractors in the Square system. Enter their personal data, including the first name, last name, and email address. Select the contractor employment type, payment type, and payment method for each person. Input their bank account information if they prefer to be paid via direct deposit. Generate a Point of Sale Passcode in case you plan to use Timecards.

Click on “Save” to complete the registration. The data you saved will be recorded in the system so you don’t need to keep entering it repeatedly each payment cycle.

Step 2: Prepare Contractor Payments

Proceed to the “Payroll” menu of your Square dashboard. Click on “Pay Contractors.” Choose the pay period dates and payment method. Select the contractors you wish to pay. Input the rates, hours, and commissions of the freelancers. If you are using Timecards or Commission Tracking, click on “Import time and wages” to automatically sync the hours and commissions in the system.

Step 3: Make Contractor Payments

Once the information is complete, click on “Continue.” Check the contractor payment details carefully to confirm that all the data is correct. Finally, click on “Submit Payment” to start the payment process. The contractors who are paid via direct deposit will receive the amount approximately four days afterwards.

Run Contractor Payroll Using Other Payroll Software

While Square Payroll is our top choice, there are other contractor payroll software that you can try. We suggest these programs as alternatives because they are capable payroll tools in their own right.

Gusto

Gusto is an all-purpose payroll platform that equips you to hire and pay employees and contractors. It allows you to focus on team management through its multifunctional features, such as full-service payroll, hiring, onboarding, time tracking, attendance monitoring, talent management, and insights reporting.

Contractors have the option to self-board online and to receive payday email messages. Gusto is commendable because it expedites payment processing for workers.

ADP Payroll

ADP Payroll is a payroll and HR tool that enables you to pay and manage your contractors and employees in a quick, simple way. It offers built-in features which cover taxes, compliance, hiring, and HR support. The personalized dashboard lets you access your payroll to-do list, payment history, and flexible payment methods. Its handy add-ons and integrations increase its functionality.

This software helps you with tax reporting by automatically generating Forms 1099-NEC for the contractors you hired. Consider using ADP Payroll because of its 24/7 customer service availability and customization options.

SurePayroll

SurePayroll is an online payroll service that is easy to use. It streamlines the payroll process for your contractors and employees through its automatic payroll, tax calculation and filing, and direct deposit setup features. It is possible for you to set up and run this tool in just a few minutes.

This platform enables you to complete your contractor payroll together with your employee payroll through a single process. Based on a SurePayroll review, it is ideal for small businesses because of its affordable pricing and simple UI.

What You Need To Learn About Contractor Payroll

Boost your expertise on the freelancer payroll process by increasing your knowledge about payroll matters. Learn the definition of payroll and contractor payroll. Discover who can be considered as independent contractors and freelancers. Find out what exactly Square Payroll is.

What Is Payroll?

Payroll is the systematic process of computing and distributing the salary of employees of a business. It also involves the calculation of taxes and the documentation of the procedure. It covers payment cycles which can be set for weekly, bimonthly, monthly, or custom periods. 

A payroll system ensures that you compensate your workers with the right amount at the right time. You have the option of carrying out your payroll tasks through a manual method or digital method using cloud-based solutions or on-premises software. Selecting the suitable payroll tools for you is vital so you can minimize time and costs when preparing payments for your freelancers.

In small startups, the business owner or associate typically handles payroll processes in small startups. In large companies, HR or accounting team members are usually responsible for payroll procedures. Some business teams choose to outsource payroll tasks with agencies, although this leads to extra expenses.

What Is Contractor Payroll?

Contractor payroll is the organized process that is tailored to the payment of independent contractors and freelancers. It is commonly used to compute and disburse the compensation of temporary workers based on payment rates and pay periods. It is also used to collect and record the personal data and tax information of freelancers and contractors. You can process contract payroll either manually or by using software solutions.

Who Are Contractors and Freelancers?

Independent contractors are nonpermanent workers who typically perform long-term projects for businesses. Freelancers are self-employed temporary workers who are usually assigned short-term or long-term projects for clients. Both contractors and freelancers may offer services or products to various organizations since they are not tied to a single employer.

Freelancers and contractors do not receive a regular salary like permanent employees. Instead, both are paid based on the projects they completed or the time they spent working for the client. That’s why there is a special payroll process for contractors and freelancers.

What Is Square Payroll?

Square Payroll is a payroll tax software that is especially designed for small businesses. It enables you to pay your contractors and employees quickly through your Square Checking account and balance. Also, it automatically files your federal, state, and local payroll taxes. And you can use it to track your freelancers’ time by syncing with timecards.

Square Payroll smoothly integrates with other related tools. Its mobile app enables you to make payments even when you are on the go. It has straightforward pricing and affordable rates. It offers technical support through live payroll service specialists who can guide you in navigating the platform and troubleshooting issues. Read our Square Payroll review to find out more about its features and pricing.

Bottom Line on Contractor Payroll

It is possible for you to manually complete the contractor payroll process in six steps. However, you can save time and effort by using freelance payroll software which simplifies the procedure into three steps.

We recommend Square Payroll if you need an excellent contractor payroll platform for your small business. Start using it now to experience its powerful payroll features, cost-effective pricing, and accessible customer support.

Conducting a payroll audit can help your small business reduce employment costs and ensure compliance with federal, state, and local labor laws. Start the process of analyzing your company’s payroll to reveal errors and inefficiencies that reduce your bottom line.

How To Conduct a Payroll Audit in 8 Steps

Your small business payroll audit should have two main goals. First, you want to make sure that you have comprehensive payroll documentation for all your employees, and verify the accuracy of these records. After you fix any errors you uncover, the second step involves finding the issues in your internal processes that led to discrepancies and updating protocols to improve the accuracy of your company’s payroll records.

If you aren’t convinced of the importance of running regular payroll audits, consider these statistics:

• Employers paid about $6 billion to the IRS in payroll-related penalties in 2020 alone
• A survey from Intuit revealed that 25% of employees have received paychecks that contain errors
• 18% of employees surveyed by Intuit said they have received a late paycheck, which increases to 32% among those who work for a company with 20 or fewer employees
• Kronos reports that nearly half of employees will look for a new job after more than one paycheck error
• Up to 30% of U.S. employees are classified incorrectly, according to the National Employment Law Project
• 45% of small businesses have no accountant or bookkeeper on staff and 25% still have a paper payroll process, as revealed in data collected by Clutch.co

Small businesses are also more likely than larger businesses to experience payroll volatility. This phenomenon is characterized by high levels of turnover and other changes that increase the chances of errors and other issues.

Before You Begin

While the word audit conjures images of endless stacks of paperwork, you can streamline the process with these eight easy steps. Before you get started, you’ll need to gather the necessary reports from your paper accounting records or payroll software system.

Type of Payroll Report

Purpose

Company-wide payroll reports

Also called a payroll register or payroll journal, a comprehensive document that includes all the details of employee compensation, tax withholdings, and deductions

Employee time reports

Details about the number of hours worked per employee per pay period (weekly, bimonthly, monthly)

Individual employee reports

Detailed compensation, withholding information, and deductions for a single employee

Payroll tax reports

Quarterly and annual reports that detail taxable employee compensation and corresponding withholdings and tax liabilities

Cash requirements reports

Information about the amount of money your business needs to process payroll and the allocation of these funds

1. Analyze Your Payroll Roster

Download your payroll roster from your company’s accounting software. Once you have this document in front of you, review your entire payroll to confirm that it doesn’t include “ghost” employees who don’t actually exist, a sure sign of internal fraud. Verify each person’s full legal name, Social Security number, current address, and position at the business.

Take this time to remove anyone who no longer works for the business. This includes workers who are currently out on disability or family and medical leave. If you employ external vendors or contractors, the payroll audit offers an opportunity to check their contracts. Make sure they have been paid only the amount owed under the designated contract period.

2. Check Pay Rates and Hours Worked

Once you verify that your payroll only includes humans who actually work for your company, make sure that they are getting paid the correct amount for the correct number of hours. Unscrupulous employees who have access to the payroll system sometimes increase compensation rates or boost the number of hours someone works so they can embezzle money. The audit should look at every timesheet and paystub for every work for the entire period since you last conducted a payroll audit.

In addition to verifying hours worked and pay rates, make sure that you have accurately distinguished between hourly and salaried employees. You must also ensure the correct classification of exempt and nonexempt employees under the provisions of the Fair Labor Standards Act. Employees who are nonexempt must receive overtime pay for every hour they work over 40 hours a week. If these workers have not been compensated correctly, adjusting this issue and providing back pay accordingly can prevent state or federal sanctions.

3. Look Closely at Variable Payments

Make sure that any employee payments that diverge from the typical amount are supported by proof of authorization. The journal of your payroll system should have a separate section for variable pay apart from standard salaries and wages. Some of the most common types of variable payments include shift differentials, profit-sharing payments, commissions, and bonuses.

4. Review Off-Cycle Payments

You also want to pay special attention to payroll cycles that occur outside the typical amount. For example, if your company should have had 24 semi-monthly payroll cycles in the year since you last conducted an audit, you need to investigate unexplained extra cycles. While some such variances could be an error or occur when the company issues a bonus or other special incentive, they could also be a red flag for fraud.

5. Perform Payroll Reconciliation

In this step, check each payroll record against the company’s general ledger. This reconciliation represents the most important part of the payroll audit, and it typically takes more time than any other step. Double-checking the journal entries in your business accounting software that correspond to your payroll records ensures that the system transmitted this data correctly. It also confirms the correct calculation of taxable wages and payroll deductions.

6. Check Payroll Records Against Tax Forms

Next, you need to make sure that your payroll records match up with the amounts you reported on IRS Forms 940 and 941. Form 940, filed annually, reports tax your company withheld under the Federal Unemployment Tax Act. On your quarterly Form 941, you report withholding of federal income tax and Federal Insurance Contribution Act taxes. In addition to reconciling your payroll records against your federal tax forms, you also need to check against the corresponding state forms.

7. Locate and Pay Outstanding Tax Bills

Your payroll system likely creates automatic tax liability reports when you owe outstanding tax payments. This may occur if the system fails to make these payments when you hire someone living in a different state and do not enter a specific tax ID number for that state. In this situation, the payroll audit ensures that you can pay the outstanding amount and avoid costly IRS sanctions.

8. Establish or Improve Payroll Protocols

When done correctly, payroll audits should enhance your company’s processes to reduce the potential for errors and fraudulent activity. End each payroll audit with a wrap-up session where you discuss findings and determine how your business can avoid these issues in the future. If you don’t have a solid payroll protocol in place, consider these best practices:

• Direct supervisor approval of each payroll run
• A weekly deadline for timesheet submission
• Documentation in writing for variable payments such as bonuses
• Restricted access to payroll on an as-needed basis
• A single pay cycle for all employees
• Modern payroll software if you don’t already have this technology in place
• A paperless reporting process to automate the audit
• A regular review of state and federal labor laws to ensure ongoing compliance
• A system of checks and balances that divides payroll responsibilities among team members

In addition, if you don’t already have a pay policy in place, establishing this type of document can prevent issues such as employee misclassification, tax underpayment, and accidental and intentional time theft. Your company’s pay policy should include transparent details about employee classifications and determination of salaries, wages, raises, and promotions. This document also details the protocol for processing payroll, making changes to this process, and addressing errors that arise. This level of transparency not only reduces the likelihood of errors but fosters a trusting relationship with your workers.

Benefits of Conducting a Payroll Audit

While you may be reluctant to dedicate valuable internal resources to an annual audit, most small businesses realize a substantial return on this investment. Some of the advantages of conducting regular payroll audits include:

• Finding and correcting data entry and calculation errors
• Detecting and discouraging payroll fraud
• Identifying changes that need to be made, such as removing a terminated employee or adding a raise for a promoted worker
• Confirming accurate tax withholdings and payments
• Correcting the accounting for sick, personal, vacation and holiday time
• Verifying you are paying workers for the correct number of hours
• Remaining compliant with state and federal employment regulations
• Reducing your risk of an external audit by correcting problems before they are flagged by the IRS
• Evaluating the cost of your payroll software and user licenses relative to features and value

Issues in any of these areas could be costly for your business, and without regular audits, multiple problems with payroll can arise and go on for some time without notice.

As your business grows, a payroll audit could reveal the need for an employee audit. With this process, you review the company’s org chart and hiring plan to determine whether it aligns with your organizational goals.

Best Practices for Easy Payroll Audits

If you keep putting off the payroll audit process because you don’t have the time, money, knowledge, or staff, you’re not alone. Fortunately, you can take measures to make the audit easier and detect underlying issues that can cost even more to correct as they persist over time.

Especially if you do not have education in accounting, consider hiring an accountant or bookkeeper to conduct an internal audit on behalf of your business. Engaging professional services can reduce the risk of expensive payroll mistakes as well as save your time for your core business operations. You don’t necessarily have to bring on a full-time staff member; instead, hire a CPA at an hourly rate to help out when needed or outsource this job to a third-party firm.

If you prefer to keep the audit internal, it doesn’t have to take over your life at work. Instead, consider spreading the items on your audit checklist over the entire year and take on just a few tasks each month. You can also delegate the tasks among team members to reduce the workload associated with the audit.

Remember that putting off a payroll audit just means pushing the work down the road. Eventually, you may have no choice but to audit your payroll records when faced with an IRS audit or a U.S. or state Labor Department claim.

Using Accounting Software for Your Payroll Audit

While manually entering payroll may work fine when you have just one or two workers, it dramatically increases your risk for errors in the process of paying your employees. You can also run into issues if you rely on old, outdated software to run payroll. Fortunately, small businesses can choose from several free payroll software options.

When selecting the right accounting software for your payroll audit, consider these factors:

• Whether the system can integrate with your company’s existing hardware and software
• The software’s ability to issue direct deposits, paper checks, or both
• The learning curve associated with using and mastering the system, including available training resources
• Whether it offers a self-service portal where employees can enter and verify their own information as needed
• The number of employees you have, since some systems limit the number of payroll records you can create

If free software options for payroll don’t quite meet the needs of your business, expect to pay about $30 per month for a flat-fee service or $4 to $12 per month per individual employee access license.

Bottom Line on Payroll Audit

Auditing payroll records for your small business can seem like an arduous, expensive process. Fortunately, each time you successfully conduct an audit that results in improvements to your payroll system, you reduce the likelihood of errors. This in turn will streamline and shorten the next planned payroll audit.

Following these simple steps can take the stress out of analyzing your company’s payroll records. If you don’t already have an organized system in place, regular audits can significantly reduce the chance of problems with your company’s payroll.

Your business has reached a point where you can’t handle everything on your own. Hiring employees seems like the obvious next step. However, doing so adds a layer of complexity to running a business that will forever change how you spend your time. One of your biggest new responsibilities and time sinks will be payroll.

What is payroll? Not all new business owners are familiar with this concept and it’s a good idea to start off with a brief explanation. Payroll is the organized process of calculating wages owed to employees, calculating and paying payroll taxes, distributing employee wages, and documenting the whole process.

How to Do Payroll with Payroll Software In 11 Steps

Since payroll is a broad concept that covers everything from payroll laws and taxes to documentation, it can be a bit too much to wrap your head around. It’s easy to run into errors if you’re running payroll on your own for the first time. Remember that the penalties for an error in taxes or employee paychecks are no joke. 

Small business owners, even those with only one employee, should certainly invest in a consistent method for running payroll. Rather than doing payroll manually, we recommend you use payroll software. These payroll processing services will manage the entire process for you from paying your employees, calculating payroll taxes, paying and filing them, to managing employee benefits.

Although different payroll software may have slightly varying steps to run payroll, the overarching process is almost the same. So here’s your easy guide on how to do payroll for your small business with payroll software. We’ll be using screenshots from the Square Payroll setup process to help you along the way. 

Step 1: Choose a Payroll Software that Suits Your Needs

The first and most important task on your hands is to choose the right payroll software. You’ve got plenty of options to choose from, but if you’re new to payroll, you can’t immediately tell which software is right for you.

Plus, some not-so-good payroll service providers run relentless ad campaigns and you might end up subscribing to them if you’re not well-informed about which one suits you best. To ease things for you, we’ve researched the market and enlisted the best payroll software for different kinds of businesses. Here are our top three picks. 

Gusto

Built for small businesses, Gusto is a robust platform that unifies payroll, benefits administration, HR, and compliance functions into a single, easy-to-use package. It offers a range of payroll tools to simplify and automate the entire process of paying your employees. Plus, advanced plans have HR services to help you and your employees make the most of your time. Read our in-depth review on Gusto to find more about it. 

Square Payroll

Square Payroll is an easy-to-use payroll software with a simple design and all tools accessible from the homepage. It lets you manage employees’ paychecks with ease and offers seamless timecard imports, automated tax filings, and a range of other helpful features. Check out our Square Payroll review to see if it suits your needs. 

Rippling

Rippling is a high-end payroll service and is a great option for mid-sized businesses. It offers HR functionalities as well as powerful payroll tools which makes it great for personnel management. Rippling also offers loads of integrations with accounting, time tracking, attendance, and other tools. 

Step 2: Set Up Employer Account on Payroll Software

Enter your personal details and your business’s information to set up your account. You just need your business name, type, address, and contact information to complete this step. Once down, you can move on to adding your employees’ information. 

Step 3: Add Employees to the Payroll Software

Add your employees using basic information such as their full name, email address, and employment type. You don’t need to go into detail; all technical stuff is handled by the software on its own. Once you’ve added the employees’ basic information and email address, the software sends them an email invite so they can complete the rest of the process on their own.

This means according to their employment type, the payroll software requests them to fill in tax forms such as the W-4, I-9, or 1099s to process contractor payroll. If you’re not using payroll software, you need to gather this information and deal with all the paperwork on your own.

Using these employee-filled forms, the payroll software automatically sorts out exempt and non-exempt employees, information about taxes and employee benefits, and other important information to run payroll.  

Step 4: Enter Tax Information

This is where you enter your business’s tax information such as the EIN number and state tax IDs so the payroll software can use them to file payroll taxes on your behalf. Find your employer identification number (EIN), if you don’t already have it, you can apply for it free on the IRS website. 

Your EIN, also known as your business’s federal tax number, helps the IRS and the government identify your business. It’s just like your company’s social security number and is essential for you to file payroll taxes. 

Also, check if your state or local government requires a different identification number such as the state income tax number, or state unemployment ID. Most states just need the EIN, but it’s a good idea to check before you continue. Once you have all the information required to set up your employer profile on the payroll software, it’s time to create your account.

Step 5: Select a Payroll Schedule and Payment Method

Once you’ve set up your account on the payroll software, you need to decide on a payroll schedule and the payment methods you’re going to offer. There are four types of payroll schedules. This includes weekly, bi-weekly, semi-monthly, and monthly schedules. But remember each state has its own pay period requirements. 

For example, your state may require weekly or biweekly paydays, depending on the occupation. We recommend you check out your state payday requirements to ensure compliance. 

In some states, the law mandates that you offer multiple payment options for your employees. Paper checks are becoming rare options for employee paychecks, and are being replaced by methods more convenient for both employer and employee, like direct deposit. Another option is pre-loaded payroll cards, similar to prepaid credit cards. 

Step 6: Use a Time Tracking System

You must have an accurate time tracking system in place to track your employees’ worked hours. The FLSA makes it a must for employers to accurately track hours for their hourly employees. A simple solution is to use spreadsheets, but if you want a more advanced solution, use time tracking software. 

Employees can clock in and out their hours through the tracking system. By integrating the time tracking app with your payroll software, you can import the total hours worked instantly. Not just that, issues like determining overtime hours are also taken care of. 

Step 7: Run Payroll

Once everything is set up and you’re ready to pay your employees, your payroll software gives you an option to run payroll for a given pay period. After you verify information, you can simply press a button to pay workers.

Step 8: Input Employees’ Hours or Import Timecards

With payroll software, you can either input employees’ hours worked manually or import them through the time tracking system you use. Note that the latter is the faster and more efficient way to pay your employees accurately.

If you import timecards, the hours each employee has worked are automatically entered. If employees have worked overtime or double overtime, those hours are entered accurately too. Note that you can still edit these hours manually if needed. 

Next up, you can add any additional payments, paycheck tips, or take cash tips into account. The payroll software uses this information to accurately calculate the gross pay for each employee. 

Step 9: Deductions and Adjustments

The most complicated part of payroll processing may be calculating and paying payroll taxes. This complexity is due to several factors. As an employer, you must calculate both what you and your employees owe when determining your company’s total payroll tax liability. Employers should withhold income taxes and other payroll taxes from employees’ wages, to be paid on their behalf. 

Federal taxes include federal income tax, as well as the federal unemployment tax. Deductions governed by the Federal Insurance Contributions Act (FICA), including medicare tax and social security tax, also need to be tracked and paid. Taxes are also owed at the state level, including but not limited to state income tax and state unemployment tax. 

All of this is taken care of by the payroll software. It calculates all taxes accurately so you don’t have to worry about any of that. You just need to make sure if there are any extra adjustments you want to make in each employee’s paycheck. For example, if you’ve received a garnishment order or want to make a post-tax deduction, you can at this stage. 

Step 10: Review Payroll Run Summary and Pay Your Employees 

Finally, the payroll software takes you to a review page where you can see each employee’s net pay and all payroll taxes and other deductions in one place. Once you’ve reviewed it, you can finally pay your employees by confirming withdrawal. 

Note that if you opt for direct deposit, the payments can take two to four days to reach your worker’s bank accounts. Other payment methods can take varying time periods to reach employees. 

As a note, pay stubs from each pay period showing information like deductions are made available to employees. This can be an additional concern but is not a problem if you use payroll software.

Step 11: Keep Payroll Records

Paying employees generates a lot of paperwork, some of which needs to be saved. Not keeping this paperwork safe is one of the most common payroll mistakes new employers tend to make. Records of payroll tax forms and other information have to be saved for at least four years. 

These records include:

• Your employer identification number
• Amounts and dates of all payments to employees
• Tips reported
• The fair market value of in-kind payments, ie. trading goods for labor or other goods, rather than paying money
• Important information regarding employees, including names, social security numbers, and occupations
• Dates of employment
• Sick or vacation pay
• Copies of each employee’s W-4
• Payroll records of tax deposits
• Copies of tax returns
• Records of fringe benefits

Keeping payroll records is essential to maintain transparency and helps you stay clear of legal trouble. It also makes it easy for you to conduct a payroll audit.  

There may also be specific requirements for different business types. Additional records may be required for some payroll deductions or other tax documents. Employers have a few other recordkeeping and reporting responsibilities. One that’s important for new employers to be aware of is notifying the correct state agency when bringing a new employee on board. 

Should You Do Payroll Yourself?

Small business owners have lots of claims on their time, so sitting down to run payroll yourself may be a sacrifice. At the same time, it’s one of a business’s biggest expenses, so it can be nerve-wracking to put it in the hands of a payroll service.

However, payroll can be complicated and time-consuming, with several aspects and a multitude of requirements as you might’ve found out in the steps above. Running payroll is not like most other administrative tasks you’re able to pull along with your main work. It’s technical and requires undivided attention to be done properly.

Thus, it’s only natural to think about whether you should hire an in-house accountant to run payroll. This might be out of the question for smaller teams but larger businesses may want to give it a thought. But if you think your business can’t afford an accountant’s services yet, investing in reliable payroll processing software is a smart step. 

You Have to Familiarize Yourself with Federal & State Payroll Laws

If you’re running payroll on your own, you’re responsible for complying with all federal and state payroll laws. This includes important payroll laws like minimum wage rules in your city or state, worker’s compensation insurance requirements, final paycheck, and PTO payout regulations. 

You’re an entrepreneur trying to grow your business. Why slow yourself down trying to learn laws and regulations? Go for automated payroll software as they take care of all the legal requirements for you. You don’t need to study any laws since these payroll services take into account all federal and state regulations automatically.

Should You Use Professional Payroll Services?

A payroll provider is usually the more expensive payroll solution. However, you’re paying for a wider range of services. They’ll manage payroll calculations and file payroll taxes for an employer, of course, but may offer a number of other benefits as well.

What to Expect

With a payroll service, payroll processing is taken largely out of the employer’s hands. They’ll handle distributing employees’ paychecks, whether by direct deposit or another method, after calculating net pay. They’ll also pay payroll taxes and manage record-keeping. 

They may offer additional services that can help both you and your employees, such as advances on future earnings and making pay stubs available. You will have to pay more for the more elaborate features, however, which can quickly add up.

Benefits of Using Payroll Software 

Payroll software lets you pay your employees with ease. It takes care of everything from employee paperwork to filing taxes and frees up a lot of your time. Employees can enter their information on the software and it automatically calculates all taxes and benefits for each worker. All you have to do is run the payroll on payday, everything else is handled by the software. 

Payroll processing software comes in a wide variety of options. Some might be better thought of as a payroll system, doing a lot more than simply filling out tax forms. Examples include Quickbooks Payroll or Paychex. Other options are less complex and correspondingly less expensive. If you’ve got a small team with simple payroll needs, check out the best free payroll software.

You’re also likely to find industry-specific payroll software. For instance, we recommend restaurant owners use the best restaurant payroll software to manage payroll.

What to Expect

Even basic payroll software options help you process payroll and calculate deductions like state and federal taxes. A full payroll system automatically makes tax payments from your bank account and produces payroll reports at the end of each pay period. Software of that kind often comes with guarantees backing their tax calculations.

At this point, some software options are on par with a payroll service, both in terms of services and expense. Some software options may also offer full bookkeeping options, or integrate with bookkeeping software to make moving information easier. Higher-end options will even notify the correct state agency when you hire new employees.

Bottom Line on How to Do Payroll 

Every business owner should know how to do payroll manually, but that doesn’t mean they should do it that way. It’s good that you’re aware of the underlying processes but given the tons of time consumed by payroll processing, smart entrepreneurs automate it with payroll software.