Hiring your first employee is exciting. It's the start of the next big phase of growth for your business and a signal of big things to come in the future. But it also comes with some responsibility, particularly in payroll management. Employees need to be paid for their time in a consistent, reliable manner that complies with local, state, and federal laws.
But don't worry: Payday doesn't have to be stressful for you as an employer. Knowing the steps involved in paying employees and setting them up correctly from the start, along with utilizing comprehensive payslip features, will help you run payroll without headaches.
This payroll guide will walk you through the process of how to start and run payroll effectively for the first time.
Payroll 101: What Is It?
Payroll includes all of your company's employees who are entitled to compensation for their work. Payroll is the process of paying out the total compensation that employees are entitled to during a specific period of time - the pay period - and on a specific date - the pay date.
As an employee, managing and executing payroll involves calculating employees' earnings and deductions during a specific pay period, processing the payments, withholding the deductions, and maintaining the records for tax and compliance purposes.
Accurate payroll is an essential part of running a business with employees. It ensures that your employees receive correct and timely compensation - thereby making them want to stay with your company. Plus, it's a legal requirement for complying with labor laws and small business tax obligations.
Efficient and accurate payroll has a direct impact on:
- Employee satisfaction and retention
- Compliance with tax and labor laws
- The financial health of your company
- The reputation of your company as an employer
Inadequate payroll is not an option for companies that want to grow and remain viable. It's something you simply have to get right if you want to retain your employees and grow your business, and that's exactly what this guide to payroll will help you do.
What's different about payroll for a small business?
Businesses of all sizes need to run payroll when they employ people - from multinational juggernauts like Apple to a retail company with two employees and a single location. Payroll for small businesses is obviously less complicated, but there are some unique features to consider.
Special features of payroll for a small business:
- Hourly vs. salaried payroll. Small businesses like yours often employ part-time and hourly employees. This payroll system is different from that for employees. Hourly payroll requires accurate time tracking for each employee - including total hours worked and overtime - to ensure correct payment amounts. This means that time clocks and workforce scheduling software are essential tools for managing payroll.
- Simplified processes and requirements. Larger companies - especially international ones - require more complex payroll solutions to stay compliant. Small businesses, on the other hand, tend to have much simpler payroll requirements, which is good news for you. You can use simpler payroll systems and stay away from more complex platforms with a steeper learning curve and high operating costs.
- Direct owner involvement. In small businesses, the business owner often handles payroll themselves. You have deeper insight into the payroll process, allowing you to make quick financial and strategic decisions and ensure you are in compliance with regulatory requirements.
- More cost-effective tools. Faced with limited budgets, small businesses need to find payroll solutions that are effective and affordable. Favor payroll services or software that offer essential features without the high price tag of enterprise solutions.
- Fewer resources for compliance. All businesses must deal with federal, state, and local payroll regulations, but small businesses must do so with fewer resources. Compliance requires a keen knowledge of applicable laws and careful bookkeeping that even a payroll manual can't always help with. That means having the support of a payroll software or third-party services that help small businesses stay compliant is critical.
Efficiency and affordability are key when it comes to small business payroll. Software plays a big role in helping independent contractors stay efficient as they scale. The ideal tool? One that handles time tracking, automated payroll processing, tax deductions, and document filing.
What's involved in payroll?
Payroll is typically broken down into three phases:
- Pre-Payroll
- Payroll
- Post-Payroll
Each phase has its own list of tasks, legal and policy considerations, and work equipment requirements. Let's look at the specific steps you'll need to complete in each phase.
Pre-Payroll
This phase includes all the work that comes before payroll. This includes basic work to create and set up payroll processes, as well as recurring tasks to continually initiate the payment process.
Preparatory payroll includes:
- Establishing payroll policies and procedures: Establish clear guidelines for pay periods, overtime, vacation, and benefits to ensure consistency and compliance. These payroll policies apply to all employees within a company and establish your obligations to employees.
- Registering as an employer: Before you can process payroll, you must register with the appropriate state and federal agencies to obtain an Employer Identification Number (EIN). Follow the EIN application process outlined on the IRS website to get started.
- Implementing a payroll system: Choose a payroll system that fits your company's needs, whether it's software, a manual process, or an outsourced provider.
- Collect employee data: Collect all necessary employee data, including W-4 forms for tax withholdings and I-9 forms for employment eligibility verification. Complete this step as part of the onboarding process.
- Track hours and calculate wages: Accurately track each employee's hours to correctly calculate gross wages - how exactly this is done will be determined by your payroll software and systems outlined in the setup phase.
Once this basic work is done and your recurring processes for collecting hours and wage information are established, you can confidently manage payroll for each cycle.
Payroll
The second phase - payroll - is where the most important work takes place. This is where you validate hours worked, calculate wages and deductions, and send payments to your team. Run your payroll on a regular basis, with the schedule depending on your company's specific payroll periods. Typically, this is biweekly or monthly.
Payroll includes:
- Reviewing and approving timesheets: Make sure the hours worked by employees are correctly recorded and approved before payroll is processed. Make this process easier by using a platform that combines time tracking, timesheets, and collaborative approvals into a single platform.
- Calculating wages: Determine gross pay for each employee based on hours worked, pay rates, and any overtime that applies. Gross pay is the total amount of money earned before any deductions.
- Calculate and withhold payroll taxes and other deductions: Subtract federal and state taxes, Social Security, Medicare, and any other deductions from the employee's gross pay. Make sure you're aware of all tax obligations in the pre-payroll phase so you don't run into any roadblocks when making payments.
- Determine net pay: Subtract all deductions from gross pay to determine the employee's net pay. Then transfer that amount directly to the employee's bank account (or send it via check).
- Issue payments: Pay employees via their chosen method, such as direct deposit or physical checks.
After payroll
Payroll doesn't stop once the money is sent to employees. There are still a few tasks to complete in the post-payroll phase.
The post-payroll phase includes:
- Sending payments and billings: Distribute paychecks or direct deposit confirmations along with pay stubs that detail gross pay, deductions, and net pay.
- Reporting and filing payroll taxes: File required payroll tax documents with federal and state tax authorities and remit any tax payments due.
- Maintaining payroll records: Keep accurate records of all payroll transactions to ensure compliance and allow for future proof.
- Retaining payroll records: Securely retain all payroll-related documents and records for the legally required period for audit and compliance purposes.
While it may seem like there are a lot of steps to follow when running payroll (and there is), after an initial setup phase, you can automate many of these steps for each payroll cycle. Modern payroll software - integrated with time tracking and timesheet tools - helps to dramatically simplify and streamline this process.
Make payroll easier with IceHrm
Running payroll sounds complicated at first. But it doesn't have to be. The right tools can make all the difference for a new employer.
IceHrm, for example, offers a number of features and modules that make payroll easier. These include:
- Automation of time tracking and payroll
- Easy review and approval of timesheets
- Automated tax calculations and billing
- Integration with other tools in your tech stack, including point-of-sale (POS) and other business management software
Running payroll doesn't have to be complicated. With IceHrm, you can automate time tracking, simplify tax calculations, and streamline approvals, making payroll easier and more efficient for new employers.