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As a small business owner, you know you need to pay your employees. After all, they’re your greatest assets and must be compensated for their hard work. But at first glance, the payroll process might seem overwhelming. The good news is that paying employees doesn’t have to be difficult. Follow along to learn how to pay employees in 10 steps.
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Here’s how to pay employees in 10 simple steps:
1. Understand State and Federal Payroll Laws
No matter your industry, there are state, federal and even local payroll laws you must know and follow. Take the time to do some research to learn which laws apply in your particular situation. Be sure to find out the minimum wage in your state, how overtime is calculated, whether you’re required to provide paid or unpaid breaks, your workers’ compensation requirements and the payday frequency requirements in your state. Don’t forget to determine if you need to withhold funds for disability insurance and local income tax.
2. Choose a Payroll Schedule
In general, there are four types of pay schedules you can choose from, including weekly, biweekly, bimonthly and monthly. Each schedule has its own pros and cons so it’s important to consider them before you make a decision. Factors such as the type of employees you hire, your industry, your budget and your payroll process will all play a role in the ideal payroll schedule for your business.
3. Collect Employee Paperwork
To process payroll, your current and new employees must provide you with certain forms, such as the W-4, I-9 Employment Eligibility Verification and State Tax Withholding if your state requires you to withhold state income tax. Also, if you plan to pay via direct deposit, you’ll need each employee’s banking information as well. If you use a payroll service, your employees might be able to submit their forms electronically.
4. Calculate Pre-Tax Pay
Now, it’s time to do some math and figure out gross pay, or how much you’ll pay your employees before taxes. The way you perform these calculations will depend on the types of workers you have.
- Hourly employees: Multiply their hourly rate by the number of hours they worked during the pay period. Don’t forget to subtract the hours they didn’t work if they took some time off.
- Salaried employees: Divide their annual salary by the number of pay periods in your annual payroll schedule.
- Commission employees: Figure out their hourly or salaried base pay and add their commission earnings for that pay period. This will be based on your unique commission structure.
5. Figure Out Tax Withholding
Your employees’ paperwork will inform you of how much of their earnings you’ll need to withhold. In most cases, you’ll withhold federal, state and potentially local income taxes, FICA taxes, which include Social Security and Medicare, and garnishments for things such as court-ordered child support and tax levies. Additionally, if your state requires unemployment insurance, you’ll want to figure this amount out too as you’ll have to pay it on the employer side.
6. Determine Net Pay
Also known as take-home pay, net pay refers to the actual amount your employees will be paid at the end of each pay period. Once you calculate each employee’s gross pay and how much you’ll withhold from their paycheck, you’ll be able to find out their net pay. To do so, subtract the amount you’ll withhold from their gross pay.
Let’s say you have a worker with a gross pay of $2,000 and you need to withhold $550 for taxes. In this scenario, their net pay, or the amount they receive on payday, will be $1,450.
7. Distribute Paychecks
Next, you’ll need to pay your employees the net pay you owe them. While there are a number of methods you can use to do so, direct deposit is the most popular option. If you go the direct deposit route, refer to the bank information you received from your employees. Keep in mind that some workers may be old school and prefer paper checks. A payroll service can simplify the process of distributing paychecks. Learn more about the best small-business payroll services.
8. File Taxes
Since you’re an employer, it’s your responsibility to pay taxes on behalf of your W-2 employees. You’ll pay taxes to the IRS and your state’s tax collection department and local government, depending on where you operate. You will also be on the hook for FICA or Social Security and Medicare tax, which will be split between you and your employees. In addition, you’ll need to pay FUTA tax or 6% unemployment insurance for each employee. Fortunately, you may be able to deduct the taxes you pay for your employees.
9. Pay Into Benefits
Some of the pay you withhold from employee paychecks will go toward employee benefits if you offer them. These might include health insurance, retirement, health savings accounts and flexible spending accounts. If you offer any other benefits, it’s your job to make the right payments on behalf of your employees into the correct accounts, each pay period.
10. Maintain Payroll Records
Per the Fair Labor Standards Act (FLSA), you must keep certain payroll records for nonexempt employees for three years. Nonexempt workers are entitled to minimum wage and overtime pay when they work more than 40 hours per week. You’ll need a record of each employee’s pay rate, hours worked, overtime pay, vacation pay and holiday pay. It’s a good idea to store all employee records into a secure, central human resources system so that you can easily access them at any time.
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1
OnPay
Benefits administration
Yes
Contractor payments
Yes
Base monthly price
$40 per month + $6 per user
2
SurePayroll
Benefits Administration
Yes
Contractor Payments
Yes
Base Price
$29.99/mo plus $5 per employee
3
Gusto
Benefits administration
Yes
Contractor payments
Yes
Base monthly price
$40 per month plus $6 per user
4
Rippling
Benefits administration
Yes
Contractor Payments
Yes
Base Price
$35 per month + $8 per user
5
Justworks
Benefits Administration
Yes
Contractor Payments
Yes
Base Price
$50/month + $8/user
Bottom Line
While paying employees takes a bit of time and effort, it’s an essential task. If you follow the steps mentioned above, you’ll be able to increase efficiency and ensure you are compliant with employment laws. Don’t be afraid to outsource payroll to a payroll company or hire a human resource consultant or accountant for some help. For further information, check out our guide on how to do payroll.
Frequently Asked Questions (FAQs)
How much should I pay employees?
The amount you should pay your employees depends on what competitor companies are paying for similar roles. Perform some market research to find out what competitors in your industry and location pay for the positions you have.
What are my payroll processing options?
There are several different ways you can process payroll. You can complete it on your own manually, use an online payroll service, hire an outside professional such as an accountant or place the responsibility on your in-house human resource team.
How do I stay up to date on payroll laws?
It’s important to stay informed on federal and state payroll laws to avoid fines and other penalties. To do so, subscribe to newsletters, join business associations and attend seminars. You can also partner with a payroll service or an accountant who can keep you in the loop.
What payroll reports do employers need to file?
Employers need to file wages paid to employees, taxes withheld, Social Security and Medicare deductions and employer’s contributions to Social Security and Medicare.
