What Is Payroll?

Payroll is the process of calculating wages for your team and getting payments to everyone. It involves tallying up wages and taxes so that employees and independent contractors get the correct amount each pay period. Payroll may need to be done weekly, twice a month, monthly, or however often your team gets paid.

Payroll is one of the most important tasks for HR. It’s necessary if you pay anyone for work. However, it can take time and effort. At larger companies, there may be an entire payroll department taking care of the process.

At smaller companies, the duty may fall to one HR person who has other responsibilities too.  

The word “payroll” is sometimes used to describe the workers and independent contractors at an organization. A company may refer to its payroll—meaning the list of workers on its books. The word can also refer to the professionals or departments taking care of payroll at a company. For example, a worker may say “I have a question for payroll.”

In this article, we’ll be talking about the process of payroll.

How Can I Get Payroll Done?

There are three main ways organizations take care of payroll each pay period. Each has its benefits and drawbacks. 

Manual

In the past, this is how most companies did payroll. Running payroll manually involves calculating the pay and taxes for each employee and cutting checks or sending payments. 

To do this, you will need to determine each worker’s net pay, gross pay, and deductions. You will need to keep track of taxes, payments, and withholdings. You’ll also need to pay and report taxes for employees.

If you’re curious about doing payroll manually, skip to the “What Are The Steps I Need to Take for Payroll” section. We’ll give you a breakdown of the steps you need to take.

The pros of manually processing payroll

The main benefit of tackling payroll yourself is that you stay in control. You get to check all the numbers to make sure they’re right and you get a close-up look at your labor costs. The main drawback is that running payroll yourself is complicated.

Mistakes happen. It can be frustrating to make a small error and have to redo some of your work.

Outsourced

Many companies choose to outsource payroll as they grow. You can hire an accountant or pay a payroll company to take care of it for you. These professionals will make sure all deductions are taken care of and that your workers are paid correctly. They will provide you with paperwork for your records.

The main advantage of outsourcing your payroll is that it saves you time—that you can invest in other parts of your business. Payroll professionals also know how to run payroll. Leaving it to the professionals can help save you the frustration of mistakes.

The main drawback is that outsourcing is expensive. An accountant or payroll company will charge you a fee. The cost will depend on the number of employees you have and the complexity of your needs.

Another thing to consider is that ultimately your organization is responsible for payroll. If your financial professional or payroll company makes an error, you are held responsible. So if you do choose to outsource, look for a reputable solution.

Payroll software

Another option is to use specialized software. This solution falls somewhere between outsourcing and handling payroll manually. You’re the one who is running payroll, but the software automatically tallies reimbursements, deductions, and withholdings. It can prompt you to make sure you’re following all relevant regulations—such as your state laws for tax withholdings.

While payroll software costs money—either as a one-time payment or an ongoing subscription—it’s less than the cost of an accountant or payroll company. It also helps you avoid some of the common math mistakes that can be made when running payroll manually. 

The biggest potential disadvantage is that payroll software may not always integrate with your HR software. You may still need to make some calculations or enter some information manually.

What Are the Steps I Need to Take for Payroll?

If you want to run payroll manually, you’ll need to take the following steps. Even if you decide to use outsourcing or software, it’s helpful to understand this process. It can help you check the work of an accountant or software system.

Unlike hourly employees and salaried employees, independent contractors don’t have taxes withheld. They must pay their own taxes. They also usually don’t get benefits like health care. 

For your independent contractors, calculate what they have earned and issue a payment. Keep track of what each contractor makes. If you pay an independent contractor over $600 in one year, you will need to send them a 1099-NEC form.

Once you’ve taken care of independent contractors, follow these steps for your employees.

Before running the rest of your payroll, you will need the following.

• A schedule or timesheet showing how much each employee has worked in the past pay period
• The salary or wage for each employee
• The most recent W-4 form for your employees
• Form 1099 for each independent contractor
• Your EIN (Employer Identification Number)
• State and local tax ID numbers
• Any reimbursement records for each worker
• Benefits information—if you offer benefits
• Any post-tax deduction information—such as any custody payments or garnishments ordered by a court

Before you get started, set aside some time. You’ll also need a secure online spot to store all your documentation and payroll information. A secure system like Connecteam helps you store HR documents and retrieve them easily every pay period.

For every employee, you need to calculate gross pay. This is their total pay before any deductions. How you do this will depend on the type of employee.

For salaried employees, divide the total salary for the year by the number of payroll periods. 

For example, if a worker makes $50,000 a year and you pay them monthly, divide 50,000 by 12. Then, add in any additional pay the worker has earned this pay period—such as any commissions or bonuses the employee has earned.

For hourly employees, you need to understand your state’s overtime rules. In some states, any time over 40 hours a week is classed as overtime. In other states, overtime happens if a worker works more than eight hours a day.

For hourly workers, multiply the number of regular hours worked by the employee’s wage. Then, multiply the number of overtime hours worked in the last pay period by overtime pay. Add the two numbers together. Finally, add in any additional pay the employee has earned.

You need to determine what pre-tax deductions should be subtracted from an employee’s gross pay. The deductions that you make will depend on what benefits your employee has chosen, as well as your state tax rules. Typical deductions include dental and health insurance, 401(k) contributions, health savings accounts, or flexible spending accounts.

You will also need to know your state’s income tax brackets and have access to the worker’s W-4. 

To calculate tax withholdings, you will need to take the following steps.

• Evaluate the W-4 to see which choices the worker checked on that form to determine tax withholdings
• Consult IRS Publication 15-T to determine the federal income tax withholdings you need to make
• Calculate the employee’s portion of deductions for payroll taxes—including Medicare and Social Security
• Calculate any local taxes your municipality or city requires

The taxes you withhold must be kept by your company in an account so they can be sent to the correct tax agency. 

Some deductions happen after taxes are withheld. These deductions can include things like child support payments ordered by a court, union fees, or wage garnishments. Pay close attention to 401(k) contributions. In some states, contributions are made before taxes and in others, they are made after tax withholdings.

Some employees are reimbursed for travel costs, supplies they need for work, or gifts. Certain states require that you reimburse employees for money they spend to do their job—such as money spent entertaining clients. If the expenses are part of an accountable plan, they are non-taxable. IRS Publication 535 has more information about reimbursements.

Some items on a worker’s pay are covered by the organization. For example, employers pay 50% of Medicare and Social Security taxes for employees. In addition, your company may match contributions that an employee makes— such as to a 401(k). Calculate what your company needs to pay and whether these items need to be paid now or quarterly.

Once you have calculated everything, you will have a final pay amount for each employee. At this point, you may need to get someone at your organization to sign off on payroll. Then, you will get your workers paid. Include a pay stub with each payment made so employees understand the deductions.

Taking Care of Payroll at Your Organization

Your team counts on the payroll system at your company to get paid on time. Running payroll correctly also lets you stay compliant with tax regulations. Whether you choose to run payroll manually, use software, or outsource it entirely, understanding how it works ensures you can confirm it’s done right every pay period.