The Ultimate Guide to Payroll Processes and Procedures

If working through the payroll management process and crunching the numbers manually doesn't come naturally to you, don't panic. There is an easier way.

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Author By the Roll by ADP Editorial Team on January 16, 2023
Reading Time 4 min read
 
 

Spoiler alert: payroll doesn’t have to be hard. Total game-changer, right?

The payroll process in HR departments of major corporations is often a slick, well-oiled machine. However, as a small business owner, chances are you don’t have the luxury of a team of people that calculate and issue your monthly paychecks for you (yet!). So, for now, you’ll need to navigate your own way around payroll processes and procedures.

If working through the payroll management process and crunching the numbers manually doesn’t come naturally to you, don’t panic. There is an easier way. Before we get into the nitty-gritty details, though, let’s get you up to speed on the basics of payroll business processes so you know exactly where you’re at and where you need support.

What is Payroll Processing?

In short, payroll processing involves everything related to compensating employees for their work. That includes calculating total wage earnings for every employee, determining and withholding deductions, completing payroll tax processing, and delivering payment.

Still, sounding complex? Don’t worry, we’ve got you! Read on for a complete rundown of everything you need to know about understanding the payroll process from a small business perspective. We’ve even put together a set of step-by-step instructions to help you through each pay cycle and remove the headache from your payroll processes and procedures once and for all. 

Payroll Processes and Procedures: What You Need to Know as a Small Business Owner

The payroll processes and procedures that apply to your small business will vary depending on how your company is set up, where you are located, and the classifications of workers you employ. Here’s a brief overview of the essential considerations.

Federal Regulations

Three key pieces of federal legislation will impact your payroll processing steps:

The Fair Labor Standards Act (FLSA)

The FLSA establishes thresholds and standards for minimum wage, overtime pay, recordkeeping, and youth employment across all sectors (private, federal, state, and local governments).

The Federal Insurance Contributions Act (FICA)

FICA requires you to deduct 6.2% for Social Security tax and 1.45% for Medicare tax from every employee on every paycheck. Employers must match these deductions, bringing the total FICA payroll tax processing amount to 15.3% per employee.

Federal Unemployment Tax Act (FUTA)

Technically, FUTA isn’t officially a payroll deduction because it only applies to employers. However, contributions still need to be recorded in each payroll cycle. Exemptions may apply based on your industry of operation. Typically, though, you should pay 6% in taxes on the first $7,000 you pay an employee in any given year.

State Legislation

Each state has its own rules regarding minimum wages, payday schedules, and recordkeeping. It’s a good idea to create a list of all the labor laws that apply to your business before designing a payroll policy. Be sure to check them monthly so you can update your payroll management process to stay current and avoid penalties.

You can check the rules that apply to you here:

Worker Classifications

Each staff member needs to be correctly classified as either an employee or an independent contractor. A worker’s status will determine which taxes they pay. Misclassifying employees can lead to penalties – not to mention disputes over unpaid wages and overtime. If you are unsure how to determine a worker's status, you can submit Form SS-8 to the IRS.

The Step-by-Step Payroll Process

What is the beginning and end of the payroll process, and what steps are included at each stage? The easiest way to develop a simple policy that you can use every pay cycle is to figure out the beginning and end of your payroll cycle, then work your way through the in-between steps methodically.

If you’re a new business, you’ll need to apply for an employer identification number (EIN) before you jump straight into creating your own customized, step-by-step payroll process flowchart. Your EIN is the nine-digit number the Internal Revenue Service (IRS) uses to track your company for tax purposes. You can apply for an EIN free of charge online by submitting Form SS-4.

Already got your EIN and ready to get going? Then let’s do this! Here’s a great example of a step-by-step payroll process.

1.   Collect Employee Information

You’ll need to collect every employee's personal information, Social Security number, and tax filing status. If you’re running a tight ship, you’ll have most of the payroll tax processing documentation you need already, as the following forms should be completed on a new employee’s first day of work:

  • Form W-4 (Employee’s Withholding Certificate) – You’ll need this to deduct the correct amount of federal income tax from each employee’s paycheck. Although not an official requirement, it’s recommended you have employees fill out a new form each year if their personal or financial situation changes.
  • Form I-9 (Employment Eligibility Verification) – You’ll need this to verify the identity and employment authorization of any individuals you hire. New employees should fill out Section 1 on their first day of work and provide copies of their ID (passport, driver’s license, etc.). After this, you have three business days to complete and sign Section 2.
  • Form W-9 (Request for Taxpayer Identification Number and Certification) – You’ll need this to collect the name, address, and Social Security number or tax identification (ID) number of any freelancers or independent contractors. You don’t need to send it to the IRS. But you will need to use the information to complete Form 1099-NEC (Nonemployee Compensation) at the end of the tax year.

In addition to the relevant tax and registration documents, you’ll need to collect a few other vital pieces of information:

  • Bank details – If you pay your employees by direct deposit, you’ll need their full name, account number, and routing number. Alternatively, they can supply you with a voided check.
  • Medical insurance forms – You may not deduct insurance premiums from employee pay without written authorization.
  • Retirement plan authorization – As with medical insurance, making contributions to a 401(k) or other retirement account is voluntary and requires written consent.

2.   Create a Record Management System

Whether you keep paper files or store employee records on an online server or cloud-based system, it’s essential you have up-to-date documentation for each employee. This ensures the accuracy of their paychecks and the continuity of their employment and professional development.

The data you store should include:

  • Contracts
  • Tax forms
  • Medical and retirement plan documentation
  • Non-compete, non-disclosure, non-solicitation, and confidentiality agreements
  • Employee handbooks
  • Signed compliance forms
  • Evidence of completed training

3.   Establish a Payroll Cycle

Pay schedules are a matter of preference based on a balance of employer and employee needs. We’ve listed the four main options you can choose between below. However, do be aware that some states stipulate minimum pay frequencies.

  1. Weekly payroll
  2. Bi-weekly payroll
  3. Semi-monthly payroll
  4. Monthly payroll

Bi-weekly schedules are the most common among American businesses, but there’s no hard-and-fast answer on which is the best payroll cycle. Switching between them once you’re into a regular rhythm can be a complete headache when it comes to taxes and accounting though – not to mention it may create some bad feeling among your employees. So be sure to weigh up your options carefully and pick the model that’s right for you from the start.

Here are a few key factors to bear in mind:

  • The more often you run payroll, the higher your overall payroll processing costs will be.
  • Contract workers and employees in lower-wage jobs typically prefer to be paid more often.
  • Most insurance premiums are charged monthly.
  • Overtime rates need to be calculated weekly under Federal law.
  • Depending on your monthly cash flow rhythms, some pay schedules might not be feasible.

4.   Track Time and Attendance

Accurate payroll require precise timekeeping. Having a documented and streamlined time and attendance system is an essential component in calculating payroll. It also helps employees with understanding the payroll process, their salaries, and taxes. You’ll need to establish clearly-defined parameters for:

  • Workweeks
  • Overtime
  • Break periods
  • Paid time off (PTO)
  • Sick leave entitlements

Software-based time and attendance tracking systems significantly reduce the potential for human error. Plus, with automated solutions that integrate with your payroll, your job (or your payroll administrator’s) becomes much quicker and easier.

5.   Calculate Gross Pay

To calculate gross pay amounts for full-time staff, divide the annual salary by the number of pay cycles per year. For hourly workers, multiply the number of hours worked by the hourly rate. Once you have that figure, add on any extras such as:

  • Commissions
  • Bonuses
  • Overtime payments
  • Expense account reimbursements

6.   Calculate Deductions and Take-Home Pay

The most commonly used equation for calculating take-home pay (also known as net pay) is:

Take Home Pay = Gross pay - Payroll taxes - Other deductions

Before you pull out that trusty calculator, it’s essential to remember that any deductions must be applied in the correct order:

  • Pre-tax deductions – Employer-sponsored health insurance, employee retirement contributions, and employer retirement contributions are generally taken out of employee paychecks before withholding taxes.
  • Standard tax deductions – Standard federal withholding taxes and any applicable state withholding payroll taxes.
  • Post-tax deductions - Employee insurance premiums, Roth retirement contributions, and garnishments like child support fees, defaulted student loan repayments, or previously unpaid taxes are generally taken out of employee paychecks after withholding taxes.

7.   Pay Your Employees

To ensure transparency, either printed or electronic wage statements are required in most states – regardless of whether you pay employees in cash or by direct deposit.

Pro-tip: If you’re paying employees by direct deposit, setting up a specific account for lump sum payroll withdrawals makes your salary payments much easier to document and audit. You’ll also need to consider any federal non-banking holidays that could impact your pay schedule and flex your payroll processes and procedures around to account for them.

Every wage statement should show the total gross wage, a list of itemized deductions, and the corresponding net salary. To avoid confusion or debate over non-payment, you should also set up a process where employees sign to confirm they have received each payment.

8.   Update Payroll Records and Submit Tax Payments and Filings

You’ll need to be able to prove to the IRS and state legislators who you are paying, how much, how often, and the reason for the payment. As a result, you’ll need to keep detailed records of:

  • Timesheets
  • Pay stubs
  • Payroll taxes withheld
  • Bank transactions of tax payments and salary deductions paid to the government

To submit federal employee and employer payroll taxes to the IRS, use Form 941. You should submit Form 941 every quarter and Form 940 (detailing FUTA taxes) annually. Be sure to check state requirements carefully to ensure you also fulfill any local reporting obligations.

Payroll in Under a Minute. Mind Blown.

We know. That sounds complicated, right? But with Roll™, hassle-free payroll is within your reach, allowing you to squeeze it into your day wherever and whenever it fits.

Roll’s payroll app for small businesses combines all of your payroll processing steps into one smooth process that’s quick and easy to set up and requires no training. As a result, it’s time to say goodbye to clunky forms and static spreadsheets and say hello to a better way of paying your employees.

And the best part? Because it’s backed by ADP, you’ll always know our experts have you covered so you can revolutionize your payroll processes and procedures with confidence, knowing that:

  • Tax filing is built-in.
  • You’ll be compliant with any changing pay regulations.
  • Your data is kept safe and private using industry-leading safeguards.
  • You’ll have access to all the help you need, when you need it, with live in-app chat support.

Interested in learning more? Check out the complete list of features and pricing today, sign up for your free trial, and get ready to Roll!


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