How to Do Payroll: A Quick Guide to Paying Your Employees

Processing payroll can be confusing. There are employees to pay, taxes to remit, and records to maintain. It's enough to make your head spin!

But payroll doesn’t have to be painful. With some basic steps, you can get organized and handle payroll with confidence. This easy-to-follow checklist will walk you A through Z, taking the stress out of payday. You’ll know exactly what to do so you can pay your people properly and remain compliant. Understanding payroll basics keeps your employees happy (and the IRS off your back), letting you focus on scaling your business.

What is Payroll?

Payroll is the process of managing an employee's wages, deductions, bonuses and other financial compensation. It involves calculating hours worked, overtime pay, taxes and deductions from an employee’s salary. Processing payroll also includes tracking vacation and sick days as well as managing benefits such as health insurance or 401k contributions.

When you process payroll, it's important to stay compliant with all relevant federal, state, and local laws. This helps all parties receive their proper compensation in a timely manner, which prevents your organization from incurring back pay penalties. 

Payroll Basics: 7 Steps to Manage Payroll for a Business

A payroll checklist helps you ensure you’ve dotted your i’s and crossed your t’s before all of those direct deposits are issued. Not only does this empower you process payments on time, it helps you collect records that can be analyzed to identify if you are meeting payroll KPIs.

1. Get Your Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a number the Internal Revenue Service (IRS) assigns to businesses for tax filing and reporting purposes. It's also known as a Federal Tax Identification Number, and you could think of it as the business equivalent of an individual’s Social Security Number.

All companies must have an EIN to file their taxes, so it's important to obtain one before you start processing payroll. This will make filing taxes easier and help you comply with federal law. If you don't already have one, you can apply for one from the IRS.

2. Set up Your State Tax ID Numbers

State tax IDs are unique identifiers that state and local governments assign to businesses to collect taxes. These IDs enable the government to track an organization’s taxable income, allowing them to accurately calculate how much they owe in business taxes. In addition, these IDs can be used when filing employee payroll taxes.

Your business may not need one — it depends on whether your company pays state taxes, which differ from state to state. You can check this online, and if you do need one, you'll need to check with your state's government for how to apply. The U.S. Small Business Administration has a tool to help assess the situation for your location.

3. Collect Relevant Employee Tax Information

When processing payroll, employers need to have the necessary employee tax information on hand. This includes each employee's name, address, Social Security Number (SSN), and filing status. Employers also need to know the total number of withholding allowances each employee claims on their W-4 form and any other pretax deductions they may have, like 401(k) contributions.

Employers should collect this information when they hire a new employee and update it whenever their tax situation changes, such as if they get married or have a baby.

4. Set Your Regular Payroll Schedule

A regular payment schedule helps ensure that you pay employees on time and accurately, as well as helping you stay compliant with federal laws. 

Setting up a payroll schedule involves deciding how often you want to run payroll (weekly, bi-weekly, monthly, etc.), when the paydays will be for each pay period, and when employees should submit their timesheets or other relevant information.

You can then communicate this to your teams, so they know what they need to do and by when. Good communication will help you minimize delays caused by missing information from your employees so you can stick to your regular payroll schedule.

5. Calculate Wages

Once you've collected the necessary employee information, you can calculate each employee's gross pay. This involves taking into account their hourly rate or monthly pay, the number of hours worked (if relevant), and any overtime pay or bonuses due. Then, you can calculate their net pay by working out any taxes or deductions.

One way to do this is by using payroll software to quickly and accurately calculate wages. Alternatively, some companies outsource this work to payroll providers, who manage the entire process for them.

6. Calculate Payroll Taxes

After you’ve calculated wages to be paid, employers need to calculate payroll taxes — including federal income tax, Social Security tax, and Medicare tax — as well as any applicable state and local tax deductions. This can be done using the wages and tax information you have collected from your employees.

If you're using a dedicated payroll system, the tool will often handle this calculation for you. And if you're working with an external provider, this will likely be part of their payroll service. You just need to ensure they've got the right information to work from.

7. Keep All Your Payroll Records

Once you process payroll, the final step is to keep detailed records of your transactions. This is important for tax and compliance purposes. For example, suppose you have an employee dispute over pay, or the IRS needs some documentation in the future. In that case, you have a paper trail of what was paid when.

These records should include your employee information, pay rate and wages paid, as well as any payroll deductions taken out. Depending on the company's size, employers may need to keep these records for up to seven years. With payroll solutions, this process is simplified — the program will store your records securely and generate reports when needed. 

Wellbeing is as Critical as Pay, Employees Say

With payroll comes great responsibility — to accurately compensate employees, remit taxes, and keep complaint records. But pay alone doesn't cut it anymore. Employees today expect more, like purpose, flexibility, growth opportunities and a company culture that supports their wellbeing. 

And a full nine out of 10 employees say their wellbeing is as important as their salary. That's why it's critical to invest in robust wellness offerings — like gym memberships, meditation apps, personal trainers, and nutrition trackers — alongside fair monetary compensation.

If you're looking to expand your wellbeing benefits to better retain and empower top talent, Wellhub offers a specialized global platform for corporate wellness. Our platform makes it easy to offer fitness, mental wellness support and more.

Start your company’s wellness journey. Speak with a Wellbeing Specialist today!

References

• Apply for an Employer Identification Number (EIN) Online. IRS. Retrieved June 14, 2023 from https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
• Get federal and state tax ID numbers. U.S. Small Business Administration. Retrieved June 14, 2023 from https://www.sba.gov/business-guide/launch-your-business/get-federal-state-tax-id-numbers#id-get-a-state-tax-id-number
• Wellhub. (2023, October 18). The State of Work-Life Wellness 2024. /en-us/resources/research/work-life-wellness-report-2024/