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Payroll

How to do payroll: manually, professionally, or with software

While there are many different elements of running a business, one of the most important is payroll. Payroll is best defined as the total of all compensation an employer must pay to its employees for a specified range of time. Without a streamlined and reliable payroll system in place, businesses may face tough consequences including poor employee retention, minimal employee engagement, and reputational damage.

Employees depend on their paychecks to go about their everyday lives—be it paying their mortgage, putting food on the table, or saving for retirement. Even the smallest error in your business’s payroll method could cause your workforce to receive their money late and create undue stress.

With that said, it’s easy to understand why having a dependable payroll system is so vital to any business. If you’re a first-time small business owner with employees, learning how to do payroll is an essential step in your operations. Using this guide, we’ll walk you through the payroll process. Keep reading to learn about the different methods, or jump right into the section below that answers your question.

Introduction to payroll methods and systems

The  payroll process involves two key steps . The first step is the preparation of payroll inputs while the second step is centered around generating payroll reports based on those numerical inputs. In their final stage, these reports are used to make regular salary payments. Though seemingly simple and straightforward, payroll is actually quite complex and requires a number of intricate moving parts for successful processing.

There are three traditional ways businesses can complete their payroll: manually, with software, or with the help of a professional. If you would like to learn how to do payroll yourself, read on.

  • First, let’s take a closer look at each method and their respective pros and cons.
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Manual

We can answer any of your questions about how to do payroll manually, but we can’t promise it will be a fast process. A manual payroll system requires the entire payroll process to be done by hand. Should you decide to do payroll yourself, you can purchase standard time sheets for documentation and ask your employees to fill them out. With the completed time cards, you can then perform the appropriate wage and tax calculations, and finally handwrite checks to your workers.

It is worth noting that manual payroll processing requires a number of involved steps that may be more time consuming than you might think. This is especially true of businesses that teeter between small and medium-sized. The more employees you have, the trickier it is to manually run payroll.

Pros:

  • Inexpensive to implement
  • Easy option for small businesses with small staffs
  • Simpler for beginners

Cons:

  • Higher chance of errors and inaccurate reporting
  • Business forced to rely on honor system for employee records
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Software

Bringing the digital element to the world of business operations, payroll software effectively leveled the playing field. These computer programs are designed to handle numerical inputs and outputs and calculate the correct owed compensation for each employee. Adding an element of automation, payroll software programs make tracking, maintaining, and delivering employee compensation simple.

Although payroll software can be considerably more expensive than manually running payroll, it’s far more dependable, secure, and accurate. Without any dependence on honor system or manual calculations, you can rest assured knowing your specialized software gets it right, every time.

Depending on the complexity of the software, you may have to pay for training to get yourself and your staff acquainted with the system. In addition, if your workforce is larger, you may need to hire payroll staff to ensure there is a dedicated effort placed on proper payroll processing. This, of course, can prove more expensive in the long run as hiring a specialized payroll person may require you to pay additional salaries and benefits.

QuickBooks payroll services are among the most popular programs small business owners and first-time payrollers choose. Offering worry-free payroll tax filing, time-saving automation, and many other advantageous benefits, QuickBooks payroll provides the support you need, year-round. And, as a premium or elite subscriber, you can get set up with payroll experts who can do the processing for you, completely virtually.

Pros:

  • Simple to maintain
  • Eliminates human error
  • Expedited processing

Cons:

  • More expensive than manual payroll systems
  • May require formal training
  • May require additional staff
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Professional

Outsourcing your company’s payroll to a professional is a cost-effective and time-saving option. Doing so takes the burden off your shoulder and puts your payroll into trusted, experienced hands. Payroll service professionals can do everything from collecting employee information and setting up direct deposit to handling pay stubs and filing tax payments. With a professional, you can expect to pay a fixed rate for the service, which eliminates the need to hire a full-time worker.

Allowing a professional to take care of your business’s payroll can provide huge benefits to your company. It can also help support a more streamlined system of business operations.

The downside to outsourcing is that when employees have payroll concerns, immediate help might not be available. However, outsourcing payroll functions will inevitably free up more of your time and allow you to keep a better handle on other facets of running your business.

Pros:

  • Simple to maintain
  • Eliminates human error
  • Expedited processing

Cons:

  • More expensive than manual payroll systems
  • May require formal training
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How to do payroll: Manually

Calculating withholding taxes, employee net pay, and payroll taxes is no easy task, but it’s required of every business owner with a workforce. If you plan to save on costs and put your brain to work, use the following steps to learn how to do payroll manually.

Step 1: Gather your tax information

If this is your first time running payroll, you’ll need to set up an Employer Identification Number (EIN) with the IRS. Your EIN is a unique number that identifies your business. The application is free and can be accessed online, by mail, or by phone.

Step 2: Have your employees fill out a Form W-4 (Employee’s Withholding Certificate)

Once you have received your EIN, you will need to collect relevant tax information from your employees. All of the information you’ll need exists on Form W-4. Distribute these tax forms to your workforce. If you have independent contractors or freelance staff, you’ll need to distribute Form-1099.

Step 3: Determine a payroll schedule

There are four different schedules you can choose from: weekly, biweekly, semiweekly, and monthly. Each comes with different advantages and disadvantages, costs, and payroll dates.

  • Monthly pay periods (paychecks per year): 12
  • Semimonthly pay periods: 24
  • Biweekly pay periods: 26
  • Weekly pay periods: 52
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Step 4: Calculate gross pay and withhold income taxes

Gross pay is the number of hours an employee has worked within a given pay period multiplied by their hourly rate. These payroll calculations are most easily tracked in spreadsheets.

To determine withholdings, tax deductions, and allowances, you’ll need to go through each employee’s Form W-4 or Form 1099. In addition to withholdings and deductions, you will need to factor in other aspects of payroll processing per each paycheck. This means you may need to consider the following:

Step 5: Pay payroll taxes

Part of processing your own payroll is calculating payroll taxes that have to be withheld from employee paychecks.

This includes a wide range of payroll taxes including Medicare, Social Security, Federal Unemployment Tax (FUTA), State Unemployment Tax Act (SUTA), State Unemployment Insurance (SUI), and Federal Insurance Contributions Act (FICA).

Step 6: File and report your payroll

After distributing your employees’ paychecks, you’ll be tasked with filing, paying, and reporting payroll taxes to the IRS. To meet federal and state requirements, you’ll need to do the following:

  • Federal tax deposits: All employee tax withholdings and FICA taxes must be paid to the IRS. The IRS requires filers to use electronic funds transfer (EFTPS) to make federal tax deposits.
  • File state tax reports: If your state requires you to collect and pay state income tax and unemployment taxes, you will need to adhere to your state’s individual pay schedule and code.
  • FUTA tax deposits: Federal unemployment taxes must be made to the IRS on a quarterly basis.
  • File Form 941: This form must be filed quarterly.
  • File Form 940: This form must be filed annually.

Step 7: Keep well-maintained payroll records

A key piece of the payroll puzzle is keeping organized and accurate records. You’ll need to be able to reference past records, and that is only possible if you make an effort to keep all documents carefully cataloged.

Keep in mind that you will need to report new hires to the IRS. This process effectively verifies that each new employee is eligible to legally work in the United States. You will need to gather the employee’s name and Social Security number.

How to do payroll: Software

Step 1: Choose a payroll provider

When selecting the best payroll provider for your needs, it’s important to consider ease of use, integrations, support, and bonus features. Ultimately, any software you choose is bound to streamline the data input process. It’s a simple matter of finding a program that’s as comprehensive as you need. Trusted software providers like QuickBooks make handling payroll a walk in the park.

Step 2: Set up payroll

The process of setting up payroll with software is similar to the manual method. You’ll need to make sure your business is properly set up with the IRS. You’ll also need to have your employees’ completed W-4 forms to add into the system. With this information, you can enter your business and employee information. From there, the software handles all calculations for you.

Step 3: Review your first payroll

Go through your payroll to double-check that all information is correct and all calculations are accurate.

Step 4: Process your first payroll run

Once your payroll software has calculated all of your employee’s wages and withholding amounts, hit the “run” or “send” button, and you’re done. The software will automatically pay your employees on the prescribed date. Do note that depending on the payroll provider you use and the level of service you’ve subscribed to, you may still need to pay payroll taxes yourself.

Conclusion

Staying on top of your payroll is one of the greatest favors you can do for yourself and your business. Whether you choose to do it manually, with smart software like QuickBooks, or with an outsourced professional, tackle your payroll with confidence. For more helpful information like this, visit QuickBooks’ YouTube channel.

How to Run Payroll with CPA Hector Garcia | QuickBooks Payroll

In this QuickBooks Payroll tutorial, @Hector Garcia CPA provides a step-by-step guide to running payroll for your employees. He takes you through three methods that businesses often use to run payroll...


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